Masimo CEO Didn't Expect Duffy's Exit, Praises 'Strong Team' Below Him

“It wasn’t a good fit for either Kevin or us,” said Masimo CEO Joe Kiani on a Q2 earnings call Tuesday, on Masimo's decision to terminate former Sound United CEO Kevin Duffy (see 2208040042). Duffy left Masimo Friday after a brief transition period.

Management initially said when it announced the $1 billion Sound United buy early this year (see 2202160060) that keeping Sound United's leadership onboard was a top priority. On the May earnings call, after the April acquisition, Kiani said, “Everyone’s working really well together.” On Tuesday, Kiani said, “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.” Masimo didn’t anticipate Duffy’s departure, he said: “To be honest with you, I did not believe we would be parting ways with Kevin.”

A “very strong team” below Duffy has "really been running the business,” Kiani said, referencing five “brand presidents” responsible for Bowers & Wilkins, Definitive Technology, Denon, Marantz and Polk Audio. “Overall, we’re very happy with that team,” he said. Masimo is in the process of naming a new leader for Sound United, “and we have a lot of good candidates to choose from,” Kiani said.

Kiani praised Sound United's Chief Operating Officer, Bilal Muhsin, as an “incredible supply chain and operations leader,” and extolled the engineering team: “We obviously are going to do our best to keep everyone that we really think we need for the journey.” The combined companies have been “moving at full speed to create many new consumer health products” via collaborative R&D efforts, he said.

Masimo reported non-healthcare non-generally accepted accounting principles gross margin of 34.8% vs. a 54.7% margin for its healthcare business. “I don’t believe we should be in any business that has that low of a margin." said Kiani of Sound United's profitability. "When you make incredibly valuable products," as the Bowers & Wilkins, Marantz and Denon brands do, "I think they should be getting a premium that will improve the margins,” he said. Sound United brands have been raising prices to adjust for higher component and shipping costs, “but our plan is to work with them to improve their margin greatly,” he said.

The medical technology company didn’t buy Sound United “only because they make great audio products,” Kiani said: “We bought them because of what we thought we could do with them" in developing the Freedom watch "and other consumer healthcare products that we’ll model a lot after our healthcare business, which will be software-as-a-service," he said. "We anticipate not only good margins on the capital in that world, but we anticipate recurring revenues from a service model that we think will be useful for our customers.”

Kiani declined in Q&A to give details on the launch timing of the Freedom watch for competitive reasons but said the company would give a “healthy dose of what we’re thinking” at the Dec. 13 investor day. Its W1 biosensing watch is in limited market release, with a full market launch due this quarter. The more advanced Freedom biosensing Android smartwatch will follow next year, he said. "Our strategy to be a leader in the deployment of clinically relevant monitoring devices within the hospital and home settings is now taking shape," he said.

On how Sound United brands are being affected by declines in consumer discretionary spending, Kiani said Sound United products are geared toward “very affluent, wealthy people” who are typically shielded from weakness in the economy. He noted a “really productive meeting where we looked at the what-ifs -- what if things do slow down a lot more because certainly you're seeing it in the low-end products,” he said, citing TVs and sound bars. Kiani acknowledged he didn’t have a track record in the consumer audio space to match his knowledge of the healthcare market, but said, “I feel that, theoretically, they are in the high-end world, so that part makes sense to me."

Masimo’s healthcare segment revenue was $357 million in Q2, 17% higher year on year. Sound United, which falls into Masimo's non-healthcare segment, had Q2 revenue of $208 million for the period from April 11, the acquisition date, through the end of the fiscal quarter, July 2, said Chief Financial Officer Micah Young.

On a pro-forma basis, consumer non-healthcare revenue would have been $215 million for the full quarter, up 4% vs. Q2 2021, with “solid growth across all regions,” led by Denon, Marantz and B&W, Young said. The combination of “strong demand with effective management of supply chain challenges produced better-than-expected sales performance during the quarter,” he said. Some two-thirds of Sound United’s business is outside the U.S., Young said, noting financial impact from foreign exchange rate headwinds.

Masimo’s revenue outlook for the non-healthcare segment is $195 million-$215 million in Q3 and $655 million-$700 million for the year. It gave consolidated revenue guidance of $515 million-$545 million for Q3 and $1.98 billion-$2.04 billion for the year. The stock closed 9.6% higher Wednesday at $157.78.