Earnings Call Transcript - MASI Q2 2022

Operator, Operator

Good afternoon, ladies and gentlemen. And welcome to Masimo's Second Quarter 2022 Earnings Conference Call. The company's press release is available at www.masimo.com. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I am pleased to introduce Eli Kammerman, Masimo's Vice President of Business Development and Investor Relations.

Eli Kammerman, Vice President of Business Development and Investor Relations

Thank you and hello, everyone. Joining me today are Chairman and CEO, Joe Kiani; and Executive Vice President and Chief Financial Officer, Micah Young. This call will contain forward-looking statements, which reflect management's current judgment including certain of our expectations regarding fiscal year 2022 financial performance. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our periodic filings with the SEC. You will find these in the Investor Relations section of our website. Also, this call will include a discussion of certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial. 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 our 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.

Joe Kiani, Chairman and CEO

Thank you, Eli. Good afternoon and thank you for joining us for Masimo's second quarter 2022 earnings call. This is the first time we are reporting results that include our recently acquired consumer business after we closed the transaction in April. The new business performed very well in the quarter with sales exceeding expectations. We also achieved a solid rebound in the revenue growth rate for our healthcare business for the quarter, with revenues rising 17% versus the prior year period, including the boost from shipping most of the delayed first quarter orders in the second quarter. In addition, our installed base grew 7% over the past 12 months, as we are experiencing strong, persistent demand for our innovative technologies. Since we closed the consumer business transaction in April, we've been moving at full speed to create many exciting new consumer health products. With a collaborative R&D effort that draws expertise from both sides of our business. We now have combined teams of engineers who are working diligently to develop many exciting new products. The long-term potential for Masimo has never been greater than it is today. A high level of conviction about the future success of our company is reflected in the 3 million shares we repurchased in the second quarter. On a related note, I'm glad to report that our board has issued a new authorization to repurchase up to another 5 million shares. Now, I'll ask Micah to review our second quarter results in more detail and provide you with an update on our 2022 financial guidance.

Micah Young, Executive Vice President and Chief Financial Officer

Thank you, Joe, and good afternoon, everyone. Before I begin, I want to point you to our earnings presentation on the Masimo website, which contains much of the detail we will discuss today. The financial metrics I will cover are primarily based on non-GAAP measures unless stated otherwise. I will also reference pro forma financial measures that include historical results for Sound United prior to the acquisition date of April 11, 2022. In today's presentation, we will refer to this business as our non-healthcare segment. Our second quarter results indicate the expected rebound and growth for the healthcare segment as we addressed the supply chain issues that limited our shipments in Q1, leading to the fulfillment of many delayed orders. There is strong and sustained demand for our innovative technologies, evidenced by driver shipments for the quarter exceeding our guidance of 75,000, reaching over 77,000 units. This marks our fourth consecutive quarter of roughly 75,000 units shipped, totaling nearly 2.4 million technology boards and instruments shipped over the past decade. By the end of the second quarter, our installed base is estimated to have grown by 7% compared to the second quarter of 2021. For the second quarter of 2022, we reported consolidated revenue of $565 million, surpassing the high end of our guidance. On a pro forma basis, consolidated revenues for the full quarter would have been $572 million, reflecting 12% reported growth and 15% growth in constant currency. The healthcare segment generated $357 million in revenues for the second quarter, showing 17% reported growth and 19% constant currency growth. Growth was supported by shipping delayed orders from Q1 tied to earlier supply chain issues. Year-to-date, healthcare revenues totaled $661 million, indicating 9% reported growth and 11% constant currency growth. The consumer non-healthcare segment reported $208 million in revenues from April 11, 2022, through the fiscal quarter's end. On a pro forma basis for the full quarter, revenues from this segment would have been $215 million, representing 4% reported growth and 10% constant currency growth. This segment experienced solid growth across all regions and product categories, driven by the premium brands of Denon, Marantz, and Bowers and Wilkins. A combination of strong demand and effective management of supply chain challenges led to better-than-expected sales performance during the quarter. Looking at our P&L, we reported a consolidated non-GAAP gross margin of 34.7% for the second quarter of 2022. Our margins were impacted by segment mix, foreign currency headwinds, and supply chain inefficiencies. For the healthcare sector, the second-quarter non-GAAP gross margin rose by 160 basis points to 66.3%, up from 64.7% in the previous year, due to a favorable product mix with a higher revenue contribution from adhesive sensors compared to capital equipment. In the consumer non-healthcare segment, the second-quarter non-GAAP gross margin was 34.8%. For our consolidated business, non-GAAP operating profit increased by 49% to $107 million, representing 18.9% of total revenue. Our non-GAAP earnings per share rose by 44% to $1.35 per diluted share. In Q2, we invested $401 million in repurchasing 3 million shares of our common stock, resulting in over a 5% reduction in our outstanding shares. In summary, we achieved strong performance in the second quarter, with revenues, operating margins, and earnings per share surpassing the high end of our guidance. The consumer non-healthcare segment delivered 10% constant currency growth on a pro forma basis. The healthcare segment fulfilled most delayed orders, enhancing our growth for the second quarter. Additionally, our healthcare revenues increased by 11% on a constant currency basis for the first half of the year. We have consistently shipped about 75,000 drivers for four consecutive quarters, showcasing the robustness of our healthcare business. I'm pleased to report that our healthcare business is flourishing, and we are consistently acquiring new customer accounts while retaining nearly all existing accounts globally for our set oximetry products. At the close of the second quarter, our contract backlog stood at $1.2 billion, a 30% increase compared to the prior year, providing a favorable outlook for our future growth. We are observing steady adoption of our technology connectivity solutions, including our root, ISO Rota Hub, and Patient SafetyNet across various hospital environments. Notably, the number of beds connected via Iris Gateway and Patient SafetyNet rose by 20%, while our route installed base grew by over 30% year-over-year. Moreover, our service revenues tied to connected beds in our hospital automation system increased by more than 20% compared to last year. Now, I would like to update you on our consolidated financial guidance for 2022, encompassing our two segments. Given the acquisition and evolving macroeconomic conditions, we are providing consolidated guidance ranges for both the third quarter and the full year. It is crucial to note that our guidance includes significantly increased foreign currency headwinds due to the strengthening of the US dollar against major currencies, which will adversely impact our margins and operating income. For the third quarter of 2022, we anticipate consolidated revenue between $515 million and $545 million. For the healthcare segment, we project third-quarter revenues of $320 million to $330 million, which accounts for $10 million in year-over-year currency headwinds, translating to 9% constant currency growth at the midpoint of the range. In our non-healthcare segment, we estimate third-quarter revenues between $195 million and $215 million, compared to pro forma revenues of $227 million for the same period in 2021. On a pro forma basis, our guidance includes $23 million in year-over-year currency headwinds, suggesting flat constant currency growth at the midpoint of the range. This business is facing tough year-over-year comparisons due to an exceptionally strong third quarter last year, boosted by new product stocking orders from a significant retail customer alongside fulfillment of backordered products. On a consolidated basis, we forecast non-GAAP gross margins of approximately 53%, with operating profit between $72 million and $80 million and earnings per share ranging from $0.85 to $0.97 for the third quarter. Moving on to our updated full-year 2022 financial guidance, we project consolidated revenues between $1,985 million and $2,045 million, a net reduction of $15 million compared to previous guidance issued on May 3. This net reduction comprises $44 million in additional FX headwinds, counterbalanced by a $29 million uplift from strong sales performance. On a pro forma basis, our guidance suggests consolidated revenues of $2.24 billion to $2.3 billion for the full fiscal year 2022, compared to $2.15 billion in fiscal year 2021. Furthermore, our pro forma consolidated revenue guidance considers $100 million in year-over-year currency headwinds, indicating 9% to 12% constant currency growth. For our healthcare segment, we forecast revenues between $1,330 million and $1,345 million, now reflecting $30 million in year-over-year currency headwinds. This represents a $13 million increase in FX headwinds compared to our previous guidance. The update suggests 10% to 11% constant currency growth over the prior year, consistent with our previous guidance range. We are also maintaining our projection of at least 300,000 technology boards and instruments shipped this year. For the consumer non-healthcare segment, we predict reported revenues between $655 million and $700 million for the period from April 11, 2022, to the fiscal year-end. This represents an increase of $26 million to $31 million compared to prior guidance, driven by strong sales performance but offset by $31 million in additional FX headwinds. On a pro forma basis, our guidance implies consumer non-healthcare revenues between $913 million and $958 million for fiscal year 2022, compared to $909 million in fiscal year 2021. Additionally, our guidance factors in $70 million in year-over-year currency headwinds, indicating 8% to 13% constant currency growth. For our consolidated business, we project a non-GAAP gross margin of 55%, assuming healthcare gross margins of 65.5% and consumer non-healthcare gross margins between 34% and 35%. This is a reduction of 130 basis points compared to prior guidance, which is composed of 70 basis points from extra foreign currency headwinds, 35 basis points from supply chain inefficiencies, and 25 basis points from segment mix. For our consolidated business, we expect non-GAAP operating profit ranging from $346 million to $364 million, reflecting a net reduction of $19 million to $22 million compared to our previous guidance. This is due to $25 million in additional FX headwinds, partially mitigated by $3 million to $6 million from improved operational performance. Consequently, we anticipate consolidated non-GAAP operating margins between 17.4% and 17.8%. Compared to prior guidance, this represents a 90 basis point reduction solely due to incremental FX headwinds. Without these currency headwinds, our operating margins would have been projected to fall within the range of 18.3% to 18.7%. Further down the P&L, we expect our non-GAAP non-operating expenses for the consolidated business to be approximately $23 million in 2022, primarily related to interest expenses from the new credit facility. We project a non-GAAP tax rate of 25.7% and an average of 55.3 million shares outstanding. Based on these assumptions, we estimate non-GAAP EPS in the range of $4.34 to $4.57. Compared to our previous guidance, this presents a net reduction of $0.12 to $0.16, attributable to roughly $0.35 in additional FX headwinds but offset by an increase of $0.19 to $0.23 from enhanced operational performance, coupled with share repurchases. Excluding the impact of additional FX headwinds, our non-GAAP EPS would have been projected between $4.69 and $4.92. In summary, we achieved strong performance in the first half of 2022 that surpassed expectations. Excluding the impact of additional currency headwinds, we are raising our full-year guidance for revenue, operating margin, and EPS due to robust underlying operational performance. Furthermore, our full-year 2022 revenue guidance suggests a constant currency growth rate of 9% to 12% on a pro forma basis. For more details regarding our 2022 financial guidance, please refer to today's earnings presentation in the investor relations section of our website at masimo.com. Now, I will turn the call back to Joe.

Joe Kiani, Chairman and CEO

Thank you, Micah. We have moved expeditiously forward with our plans to become a prominent company in the consumer health and wellness space. Our W1 Bio sensing Watch is now in limited market release. We've been moving and receiving excellent feedback and expect the full market launch of the W1 to occur this quarter. Our bio sensing smartwatch, which we refer to as FREEDOM will follow next year. And that watch will have a much larger feature set than the W1 including Android watch features. Our strategy to be a leader in the deployment of clinically relevant monitoring devices within the hospitals and home settings, is now taking shape as we initiate the development of new products that integrate our healthcare technologies with our consumer non-healthcare technologies. These innovative products are intended for home health and wellness use, as well as hospital and healthcare use. Our mission is dedicated to improving lives, taking non-invasive monitoring to new sites and applications while improving patient outcomes and reducing the cost of care. With that, we'll open the call to questions. Operator?

Operator, Operator

Our first question today is from Mike Matson with Needham & Company.

Mike Matson, Analyst

Yes, thanks for taking my question. I guess where I can start, with the consumer strategy and the smartwatch. Maybe you could talk about what you think it is about your smartwatch either the W1 or this upcoming brand watch that is really going to help differentiate you in the market versus some of the bigger companies out there like Apple or Samsung.

Joe Kiani, Chairman and CEO

Well, during this limited marketed release phase, I'll tell you what our customers are telling us. They have never had a product that allows them to do the things they've been wanting to do. So, for example, the continuous and accurate information on oxygen saturation and pulse rate. It's not been there. And whether it's used for sending patients home from hospitals, patients that are at risk that need to be monitored remotely, or even athletes that use some of that information for better training and better preparing for competition, they're telling us it is different. It's unique. And it's compelling. In addition, we have some unique new parameters that have never been released in a commercial watch before, for both healthcare and consumer wellness, which we're hoping to release with the launch of W1. And then as far as FREEDOM, I want to just tell you that the things I said before are no more because of the competitive nature of this business. But we believe we have a compelling design, we believe with the addition of the Android features, and some unique features that, again, have never been made available before. We think we have a great product. So we think we have a product that should command 100% market share, which is what you want to have for your team to feel. So the question is, do we have now the right distribution channel and the right salesforce to hopefully make the most out of it? Time will tell, but we've never been better prepared. I can tell you, the whole united Masimo team is excited. We're all grateful for the efforts that they have put in to date. But we've got a lot of work ahead of us. I think it's revitalizing our team.

Mike Matson, Analyst

Okay, great, excellent. The guidance for the third quarter particularly for EPS is there's a pretty big differential there versus you were modeling things. Is that just maybe a function of sort of the seasonality with the new consumer business kind of in the mix or something? Just, I understand what happened with the overall kind of annual guidance and whatnot to your currency. But it just seems like there's a kind of a bigger delta there in the third quarter guidance versus consensus.

Joe Kiani, Chairman and CEO

Well, Q3, even for the healthcare business has historically been the lightest quarter, as you know, our business is typically aided by people having procedures, which they have less of, elective procedures in the summertime but also the flu season, which comes in Q4 and Q1 timeframe. And I think on the consumer side, a lot of business gets done in the holiday season in Q1. So I think they're kind of in the same boat. So we don't, there's nothing that we're alarmed about. It's just the way we see the whole year.

Micah Young, Executive Vice President and Chief Financial Officer

Yes, Mike, just add to that to Joe's point. The strongest quarter for the consumer non-healthcare segment, is of course, the fourth quarter. And there's a lot of investment that goes into the business throughout the year preparing for that fourth quarter. So that's having some impact on the year-over-year comparisons. The other thing is FX headwinds are very significant. So if you look at versus our prior guidance, just for the third quarter loans, about 170 basis points of FX headwinds on our operating margin. So something to keep in mind.

Mike Matson, Analyst

Okay, got it, thank you.

Operator, Operator

The next question is from Jason Bednar with Piper Sandler.

Jason Bednar, Analyst

Hey, good afternoon. Thanks for taking the questions. Joe, I wanted to start with a recent announcement to part ways with Kevin Duffy, the prior CEO of Sound United. I can't help but ask you indicated when you announced the transaction six months ago that retaining Sound leadership and talent was a top priority and is what you saw as the biggest risk to a successful integration or outcome from the acquisition. Could you help us understand what changed in kind of three months post deal that required this leadership transition? And maybe help us feel comfortable that the risk level here has risen and fill us in on how you have planned in terms of backfilling that leadership position.

Joe Kiani, Chairman and CEO

Sure. Well, I think as you go through this journey and you're working side by side, sometimes it feels like it's a good fit. And sometimes it doesn't feel like it's a good fit. And it wasn't a good fit for either Kevin or us. We have parted on amicable terms. He has been wonderful in the exit process and has committed to helping us post his last day, which was August 5. The good news is, we have a very strong team below Kevin that have really been running the business the way that it should be run. There are five basically presidents, there's a brand president that was responsible for Bowers and Wilkins, one of them, one of them, Marantz, one of Denon, one of Definitive Technology and another one, Polk. Overall, we're very happy with that team. We also have a wonderful head of engineering, there's the chief operating officer, that those brand leads reported to, an incredible supply chain and operations leader. Underneath them is a very strong bench; we've had a chance to meet a lot of them. So yes, we still feel great about the team, we obviously are going to do our best to keep everyone that we really think we need for the journey. All along the way, these things may happen; we certainly did not anticipate it. So, to be honest with you, I did not believe I would be parting ways with Kevin. But it is what ended up happening, and we're going to be good. I'm really excited about the future; we're going to be naming a new leader to lead that team from the Sound United team. We're just going through the process right now, and we have a lot of good candidates to choose from.

Jason Bednar, Analyst

Alright, that's helpful. Thanks for that. And then maybe to follow up on Mike's question and just to dig in a little bit deeper, because I think this is the first time you've talked a little more openly about the mass market consumer watch, just so any details that you're willing to give us on FREEDOM? Beyond what you disclosed there, I'm not sure if you're willing to move forward with a price point on that product. Also just any go-to-market activities you have planned, how you're going to go about that, what kind of investment spend we should be prepared for as you enter full market release of W1 and the launch of FREEDOM? And then maybe, Mike, just curious how you'd have a start thinking about modeling in contributions from something like W1 and FREEDOM? Are you willing to throw out any year one or year two targets? Is something like $10 million or $20 million in revenue reasonable?

Joe Kiani, Chairman and CEO

Yes, we would love to share with you all the things that we're excited about FREEDOM. But I think for the benefit of all of our shareholders, it's better that we don't. What I can tell you is FREEDOM will have the same bio-sensing technology as W1, at a minimum, the feature sets that come with the Android watches that are out there, and some other cool stuff. As far as what have you been doing to prepare? As you know, our strategy has always been to provide any of our customers with clinically relevant products. This becomes even more important for people that are further away from clinical oversight. The purpose of W1 is to prove it under clinical oversight and hospital-to-home environment. It's a very clinical selling process, which we have nearly 1,000 salespeople that will be doing that for us. Then as we get to FREEDOM, that's the product that we are going to need help from the Sound United team that we've invested quite a bit to acquire and to motivate and keep going. It's a phenomenal number of people that have spent, some of them decades doing this, but before them their predecessors, I can’t say too much more. But the previous team before them spent 50 to 100 years of time building this incredible distribution channel that's 20,000 distribution points strong. Of course, we're planning to do additional things as well. I think all of these have been modeled, and we look forward to sharing as much of it as we can with you at the Investor Day meeting in December. Micah, do you want to add anything to that?

Micah Young, Executive Vice President and Chief Financial Officer

Yes. Jason, I think as you know, we're always thoughtful and prudent with our guidance. We're still learning a lot about how we're going to commercialize some of these new consumer health products, sizing the markets and also the target consumers for those products. So we don't want to get ahead of ourselves there. The good thing is we don't have to; I mean, the business is growing double digits. And we've got a very strong business today. So we're going to be thoughtful before we start to bring that into our guidance as we move forward in the next year.

Jason Bednar, Analyst

So sorry, I know it's going to be small, but just is it safe to assume that whatever you're assuming for W1 is baked into this year's guidance with respect to the full market release?

Joe Kiani, Chairman and CEO

Well, just from a practice perspective, we've learned the hard way not to put anything in our guidance until the product is released. So far, the guidance we've given you does not have the W1 revenues that hopefully will come except for whatever we have received in a limited market release period.

Operator, Operator

The next question is from Jayson Bedford with Raymond James.

Jayson Bedford, Analyst

Good afternoon. Can you hear me okay? Perfect. So maybe just to follow along the last line of questions, and then we have a question for Micah, the full market release of W1, what does that entail? Meaning is this a global launch? And I assume the sale will start in a hospital setting? And if so, how will the logistics and economics of this work?

Joe Kiani, Chairman and CEO

Yes, it is going to be a global launch. We're direct in about 40 countries. We have distribution in another 90 plus countries. So it will be a global launch. As far as, there are two paths for W1; we are submitting our FDA 510-K for that product that will be for hospital and clinical use, as well as we're going to be targeting prosumers, these are athletes, these are people who want to be fit, they may be people that are concerned about their health, they may have COPD and they may have heart conditions that they just want to monitor themselves. So those will be our targets. We plan to augment our salesforce with e-commerce, both from Masimo as well as potential partners that we join, and we are looking at partnering with some organizations that have a healthcare focus to consumers that we may join forces together to further the availability of W1 for as many people that want to take advantage of it.

Jayson Bedford, Analyst

Okay, thanks Joe. So that's helpful. Micah, just on the healthcare business in 2Q, if I recall, 1Q was about $25 million short because of the supply issues, is that how we should view that the 2Q overage? I'm just trying to get at an underlying growth rate and if there's any comments between drivers and consumer.

Micah Young, Executive Vice President and Chief Financial Officer

Great question. So the way I look at it internally here is I look at it year-to-date; we're growing 11% on a constant currency basis. That really takes into account the timing of all those shipments; it's really hard to parse it out and see what each quarter would have grown. But if you look at year-to-date, we grew 11% constant currency. That's how we're viewing the strength of the business right now.

Operator, Operator

The next question is from Rick Wise with Stifel.

Rick Wise, Analyst

Good afternoon. Hi, Joe. Hi, Micah. I’ll start with the healthcare business. There's been a great deal of just broad-based concern, not just specific to Masimo, about the capital environment, hospital financial health. And I mean, gosh, it seems like you had an excellent quarter and backlog strong, et cetera, et cetera. Are you concerned at all about the capital environment? Are you concerned about the pace of new spending or the timing of new spending? Just at a high level, wondering if you're seeing anything that we should be sensitive to?

Joe Kiani, Chairman and CEO

Well, our healthcare business has never been a capital-intensive business. It's really been a technology as a service model, if you will. We purposely have done that; it doesn't mean we don't have capital revenue, we do have a small amount of capital revenue, so of course, any reduction in that will reduce that, but that's a minority of our revenue. So we're not greatly concerned about that. But, obviously, at the same time, we're all in the same boat. We'd like to see our OEM customers thrive with their capital sales, and so all-in-all, we're good, but we hope to see things improve for them.

Rick Wise, Analyst

Nothing unusual. Good. And turning to gross margins. Micah, maybe you could expand on your comments there, you spelled that very clearly, the pressures that FX and supply chain are having. But I guess two questions, one, what's next and what steps are you taking to try to particularly, can't do much about currency? But what can you do about supply chain and sourcing? Is that going to get fixed? What's your expectation; things get stayed the same? Or gradually get better? And separate, but related on the Sound United gross margins? How do we think about this going forward? Do we need to get the watch launch to get margins up? I'm sure you're not satisfied with margins in the current range. How do we think about the second half and the outlook for next year and beyond? Thank you.

Micah Young, Executive Vice President and Chief Financial Officer

Yes, Rick, it’s a great question. So as I mentioned earlier in prepared remarks, we are facing about 130 basis points of total headwinds, half of that being FX or more than half. If you look at our underlying operational margins down 60 basis points on our prior guidance about half of that a segment mix. The other half is some of these supply chain inefficiencies. I mean, every company right now is facing supply chain challenges. I think some of them, I still believe a lot of these challenges are transitory. I think we're going to be facing them for the back half of this year, maybe the first part of next year, but a lot of it has to do with just that there's not a consistent flow of components and raw materials, which creates a lot of inefficiencies in our production process because we're not only having to expedite the freight on those components coming in. But then it creates inefficiencies in our manufacturing lines, because we're waiting on those components. Once we get them through the manufacturing line, we have to expedite them to our customers and make sure we are meeting our customers’ needs. And that's the most important thing for us. So it's a challenging environment. I can't predict when it's going to get better, but I would think that we're probably seeing the worst. From here, hopefully, it does get better as we start to move into next year. I think that's going to give us great opportunities to drive more improvements in our gross margins back over time, but we just need to navigate through this and as the team has done a great job. We've validated multiple vendors now. I think it's woken up a lot of companies out there who are focused on just pure efficiency to try to get as much volume with one vendor. It's helped us to distribute some of that production and some of our vendor base, and we're in a better spot. Plus, we're building inventory safety stock. You are seeing that investment coming through our financials, but I think we're going to be in a better spot moving forward, making sure that we are meeting those needs of the customers and putting them first.

Joe Kiani, Chairman and CEO

I’d like to add a few points regarding hospitals. They are currently facing significant challenges, which include bringing in traveling nurses at rates of $175 per hour, and dealing with rising prices from various companies. We have chosen not to raise our prices on the healthcare side, absorbing the extra costs in hopes that this situation will be temporary, allowing us to support our customers during this difficult time. However, if these conditions persist, we may have to reconsider our pricing strategy, which we have maintained without increase for the past two years. On the consumer side, I believe we shouldn't engage in any business with such slim margins. When producing high-quality products like Bowers and Wilkins, Marantz, and Denon, those brands should command a premium that enhances margins. They have been increasing their prices to adapt to the higher costs they’re experiencing in both cost of goods sold and shipping. Our strategy is to collaborate with them to significantly improve their margins. As you mentioned, Rick, our acquisition of Sound United was motivated not only by their exceptional audio products but also by our vision for integrating them with FREEDOM and other consumer healthcare offerings. We plan to model these initiatives on our healthcare business, focusing on technology as a service. We expect not only strong margins in this area but also recurring revenue from a service model that we believe will be beneficial to our customers.

Rick Wise, Analyst

That's very helpful. If I could just follow up on that. Joe, when the deal was announced, I felt that you and the team were planning to hold an Analyst Day or at some point share more about your long-term vision. We're getting some insights tonight, but when do you think we might hear more about your longer-term perspective? I know that's part of the FREEDOM and W1 launch, but when can we expect to hear more from you in detail? Thank you.

Joe Kiani, Chairman and CEO

Sure, Rick. We would love to share our thoughts with you because I think you'll find it interesting and exciting. However, we need to be careful not to reveal too much to our competitors. In summary, I think you'll gain valuable insights into our thinking this December at Investor Day. Do we have a date for that yet?

Micah Young, Executive Vice President and Chief Financial Officer

December 13th.

Joe Kiani, Chairman and CEO

December 13th, we're going to drag you out of anywhere it's raining or snowing and bring you to California. Hopefully, you'll come. And then I think when we launch FREEDOM, obviously, we'll share more. There are a couple of really what I think will be breakthrough products. When they're out, you'll see what we had in mind. The full story might take a couple of years before it comes out. But we'll try to share with you as much as we can on December 13.

Operator, Operator

The next question is from Marie Thibault with BTIG.

Marie Thibault, Analyst

Hi, good afternoon. Thanks for taking the questions. Joe and Micah. Wanted to follow up here on some comments, Joe that you just made about the consumer side of the business and those premium-priced products. We certainly heard from some other consumer tech companies this quarter that with consumer confidence at a low there is concern about discretionary spending. We'd love to get your thoughts maybe what you're hearing from your brand presidents in terms of customer appetite for these great Sound United products.

Joe Kiani, Chairman and CEO

Yes, well. We, first of all, believe most of the Sound United products are geared towards very affluent, wealthy people which are, for better or worse, usually more shielded from some of the weakness in economies when they occur. In addition, we've met with them and had a really productive meeting where we looked at what if things do slow down a lot more, because certainly, you're seeing it in the low-end products in the consumer product lines that are out there from TVs to soundboards and things like that. Still, the forecast that we've given you is in line with the worst case of what they could project. While I don't have historical data like I do for the healthcare business, I've been running here for over 30 years to give me the confidence on everything that has to do with Sound United. I feel that theoretically, they are in the high-end world. So that part makes sense to me and my belief in the team and the way they thought about it seemed like good critical thinking and a lot of conservative modeling. So yes, we think we should be okay.

Marie Thibault, Analyst

Okay, that's very helpful. Thanks for that. And then on the Investor Day, I realized it's been pushed out a couple of months from what we'd hoped in September. What was sort of the thinking behind that? What is it that I guess, led to some of that delay? And would we expect to hear more on the hearing aid product as well, in December, just any updates on that product category?

Joe Kiani, Chairman and CEO

Yes, we pushed it out one; you can imagine the effort that has taken for Micah and his team to consolidate the financials with a company that was not public, and wasn't really being run to go public. We didn’t want to break the horse that was giving us the ride. But then secondly, we know you guys want more, and we feel like by December, hopefully, we'll be able to share more. Yes, we definitely will share with you information about hearables.

Operator, Operator

The next question is from Michael Polark with Wolfe Research.

Michael Polark, Analyst

Good afternoon. Thank you for taking the questions. Maybe I'll start on just capital deployment cash flow question. I mean, the balance sheet has been materially altered in just six months here post Sound United. And now we have the buyback. I'm doing math $750 million net cash. Entering the year now, just about $700 million of net debt, I guess, curious for updated thoughts on your comfort level here with this kind of different profile number one, any kind of target leverage metrics you might want to toss out about where this is comfortable on the high end, or where you want it to go over the midterm. And then just the related, as you know, kind of a lot of moving pieces with Sound United coming in and curious where you think, kind of durable free cash flow is for the enterprise over the next year or two?

Micah Young, Executive Vice President and Chief Financial Officer

Yes, Mike, this is Micah. So if you look at post, I'll go through those questions; I'll step through those. In terms of our leverage, I've always been comfortable with three times or less in that zone, our net leverage is under 1.5, we generate strong cash flow as a company. It’s under 1.5, we're getting very good interest rate on the debt, we're in a good position there to service that debt with our cash flow and even invest back even more in the business. So that's number one. As we look at capital deployment, the reason we have a lot of confidence in the long-term growth of this business, and that's why we're reinvesting in our shares for Masimo. That's something that we looked at it and we think that reinvesting back into the company in our shares is a great capital deployment for us. In terms of cash flow, the softness we're seeing in cash flow is number one, we've had some acquisition-related costs that are transaction-related. So we had to pay those in the first half that suppressed our free cash flow. If you pull that out, we still are seeing good strong cash flow that we expect for this year. The other thing is we're investing in inventory. If you saw what happened in Q1, something we don't want to repeat. So we're trying to make sure we get sufficient safety stock levels. I think that's very prudent for the company to do and make sure that we're putting our customers first, as I mentioned before, so hopefully that answered some of those questions. I'd open for any follow ups you have on that.

Michael Polark, Analyst

My follow-up topic was just a timeline and upcoming milestones for the legal proceedings with Apple. Any major events you expect over the next three to six months before year-end that we should be monitoring?

Joe Kiani, Chairman and CEO

Yes, we had our ITC case against Apple, and we anticipate a ruling by our judge by September 15. Then, by January, the Commission will make their decision. Assuming they both will go forward within joining the infringing Apple Watch. We should have something in place by March, April next year, subject to presidential review. Our patent case has been stayed in the federal court. Our trade secret case will happen in March. There'll be a jury case with Judge Selna. We expect some time in April we'll have a decision there. I was in the ITC case for about half of it. I was asked to leave because of Apple confidential documents that were going to be disclosed. The portion I was in I felt very good about our case. From what I understand, the documents that I couldn't see were not favorable to Apple. So you never know what's going to happen. We feel good about it. Hopefully, we'll have some news on September 15.

Michael Polark, Analyst

Appreciate that, if I can sneak one more topic in. Is there an update on opioid safety net? I feel like we were talking about it every quarter. There's a pathway in Europe commercially. There was a regulatory pathway here in the US, and I haven't heard an update there for at least a couple of quarters. So if there's any additional color on where that effort stands that you can provide. I'd appreciate it. Thanks for taking the questions.

Joe Kiani, Chairman and CEO

Absolutely, yes, we're pushing hard around the world with safety nets alert, mainly made for opioid. It's been going well in the US; we're waiting for FDA clearance. I believe we've given FDA everything it requested. Again, if you remember, this is a product that the FDA chose as one of eight products out of over 250 companies that could help the opioid epidemic and gave it a breakthrough status as well. I know the FDA is also eager to release the product hopefully soon. We did report on it because I think we're getting tired of waiting too. But we are looking forward to the launch. If anything over the last two to three years, the problem has gotten worse. Over the last 12 months, 100,000 people in the US were killed due to overdose, 20% of those we believe were due to prescription opioids. We believe we have the right solution; we believe they'll save tens of thousands of lives a year. We'll let you know as soon as we get our clearance. I think that's the last question. So thank you all for joining us. I hope you all enjoy the rest of your summer. We look forward to the next quarterly call and seeing you on December 13. Bye, bye.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.