Masimo (MASI) Q2 2021 Earnings Call Transcript

Masimo (MASI -0.75%)
Q2 2021 Earnings Call
Jul 27, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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. [Operator instructions] 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 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.

Joe Kiani -- Chairman and Chief Executive Officer

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 electric 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 are elective surgery volumes steady returning to pre-COVID levels, but more hospital beds are monitored beds now. 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.

Micah Young -- Executive Vice President and Chief Financial Officer

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 cells.

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 period 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 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 margin -- 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 in 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 increase 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 230 basis points to 23.4%, compared to 21.1% in the prior-year period. Moving further down to 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 nonoperating 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 U.S. 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.

Joe Kiani -- Chairman and Chief Executive Officer

Thank you, Micah. During the first half of 2021, we've seen an encouraging recovery in hospital census that gives us optimism that things should be returning to normal in most of the markets we are direct in by year-end. This recovery has translated into a step function increase for our single-patient use sensors used in the critical care area, including operating rooms and ICU settings. For the second quarter, SET single-patient use sensors and capnography cannulas had year-over-year volume growth of more than 25%.

And our SpHb, SedLine and O3 single-patient use sensors had year-over-year volume growth of more than 90%. Our discussions with hospital executives have revealed their intentions to broaden the practice of continuous monitoring to more patients and their institutions. After being catalyzed by the pandemic, the expansion in monitoring is continuing because of rising awareness of its value and improving outcomes and reducing cost of care. Dartmouth-Hitchcock's 10-year study of Masimo SET, pulse oximetry and Patient SafetyNet in postsurgical wards prove that monitoring outside of the intensive care unit saved lives and reduced our 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 winning new customers and renewing contracts with existing customers. We've captured new contracts with sizable institutions, such as the University of Utah, Grupo Angeles in Mexico and Vivantes Netzwerk für Gesundheit in Germany. As for Masimo SafetyNet for opioids, we still 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 prescription and elicit users of opioids at home.

As I mentioned on previous calls with you, we expect to have exciting innovations to announce over the next 12 months. We've been working very hard to develop some truly remarkable solutions, and we hope our customers and you will be excited about them, too, when we introduced them. In closing, we have a positive outlook for the second half of 2021 and remain committed to our mission of improving outcomes and reducing the cost of care and taking on recent monitoring to new sites and applications. With that, we'll open the call to questions.

Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Rick Wise from Stifel. Your line is now open.

Rick Wise -- Stifel Financial Corp. -- Analyst

Good afternoon. Thank you, Joe, and great to see the strong quarter. I'm guessing that despite the incredible driver number that people are going to want to understand better the gross margin pressures due to the accounting change -- the accounting standard adoption. And I don't want to be dumber than usual, but maybe, Micah, you can just help us better understand what impact did that adoption have on gross margins in the quarter.

Was it a 100, 50-, 100-basis-point headwind? What might it have been just to try to understand that impact relative to sort of the overall rest of the business. And if I heard you correctly, you're talking about now sensor volume -- sensor gross margins will be better, how do we think about, in a sense, you -- the pace or the magnitude that you, got the right word, but recapturing some of that gross margin and the timing there? Sorry for the long question.

Micah Young -- Executive Vice President and Chief Financial Officer

Yes. Thanks, Rick. Great question. So the way that I'd size it up for the quarter is we believe that the headwinds are coming in at about 160 basis -- over 160 basis points of headwinds higher than we expected in the quarter.

And if you look and kind of going back to your second question, as we place this equipment under ASC 842, we recognize, upon equipment installation, the lower margins associated with that equipment and in return for the higher margins in the future. So as you think about the rest of the year, we will see steadily increasing gross margins based on -- that's implied in our guidance. However, we're also contemplating some of the headwinds we expect because we are seeing higher installations this year, and we're seeing stronger drivers going out to customers. And as we place more of these under contract, we will still have some headwinds for the back half of the year.

So we're happy to make this investment because this strengthens our recurring revenue stream in the future in terms of single-patient use sensors. So that's all implied in our guidance. We've factored the headwinds based on our best estimate and what the installations we expect right now for the back half of the year, and that's incorporated into our 66% for the full year.

Joe Kiani -- Chairman and Chief Executive Officer

Yes, maybe, Rick, if I could just add just to make sure there's clarity on this. When we sell a capital equipment like a Root or Radical-7 or an OEM board to our OEMs, that comes with margin, whatever we sold it for minus the cost. And we don't have this 842 issue. The 842 issue happens when we place the equipment free of charge for, let's say, five-year sensor agreement.

And before 842, we would not take a charge for that capital when we installed it. Now based on the 842 rules, we do. So the negative is when we have a strong set of new contracts like we've had recently, when you place that equipment you get a hit with the margin at the beginning, but the benefit is, unlike before 842, now as we ship sensors into the account, we get our normal margin. We don't have to reduce that margin based on the cost of the capital over the five-year period.

So when we -- right now, what we projected for you for the rest of the year is based on a -- I think a realistic, maybe conservative, estimate of how many new contracts and how many new drivers we're going to install. So the only way it could get worse is if we end up doing better and we get more customers than we anticipate to sign up for our five-year contracts, to convert from our competitor to Masimo for the next five years. So in a way, unfortunately, though there's a margin hit, it's good news and that it tells you we're doing better than we expected and attracting new customers.

Rick Wise -- Stifel Financial Corp. -- Analyst

Yes. I totally get it. And it does seem like a positive, it's just optically a little confusing. But having said all that, Joe and Micah, how do we think -- I'll invite you to help us think ahead to '22, '23.

Just at the highest level, how do we think, factoring all that in, about gross margin, the ability of gross margins to move higher from this new post-standard adoption level? I mean, are we talking -- I guess, one, we should still assume they can move -- can and will move higher, all things equal. But any extra color about what that could look like?

Joe Kiani -- Chairman and Chief Executive Officer

Yes. Well, I guess -- OK, let's do a supposed situation. If we don't sign up any new customers and all we're doing is serving the current customers we have, our margins will approach 70% plus. If we start to have more customers, which we hope we do, if it's at a conservative rate, it's the margins that we've been talking about and what we updated you on.

If we do better than that, then it will be hurting. So the way you have to think about it, let's say, in three to five years from now, the margins are going to look a lot better because of 842 than they would have due to this new way we have to account for the capital installations.

Rick Wise -- Stifel Financial Corp. -- Analyst

Great. No, I feel there'll be other questions. I just wanted to get that out there. If I could squeeze in just two more, if you wouldn't mind.

Just given the strong recovery -- and Joe, you highlighted the recovery in procedures, are you seeing -- are you concerned at all about this latest wave of COVID? And maybe, Micah, just -- and I'll just ask this now, can you help us think about the third quarter, fourth-quarter cadence, the flow, as we think about the second half in terms of quarterly mix and numbers?

Joe Kiani -- Chairman and Chief Executive Officer

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, 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 surgery. So we are anticipating that things are going to continue recovering.

Micah Young -- Executive Vice President and Chief Financial Officer

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've 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.

Rick Wise -- Stifel Financial Corp. -- Analyst

Thank you very much.

Micah Young -- Executive Vice President and Chief Financial Officer

Sure.

Joe Kiani -- Chairman and Chief Executive Officer

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

Micah Young -- Executive Vice President and Chief Financial Officer

Yes, Rick, just one thing to add there. Historically, if you go back on kind of normal years, our revenue percentage in Q3 is about 24.3% of our full-year revenues. So that's pretty consistent in -- outside of last year.

Rick Wise -- Stifel Financial Corp. -- Analyst

Perfect. Very helpful. Thank you, Micah.

Micah Young -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

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

Matt Taylor -- UBS -- Analyst

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, I guess, for the rest of this year, 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 toward the 70? How do we think about modeling it kind of phased out over the next couple of years?

Micah Young -- Executive Vice President and Chief Financial Officer

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.

Matt Taylor -- UBS -- Analyst

OK. And you called out some pretty positive trends in the sensor utilization and with the new products. And maybe you could just also give us a sense for -- you have a new -- a lot of new product flow coming up here in the second half of the year with Lidco ramping, opioid SafetyNet, hospital automation expanding. Could you just characterize how much those new things contributed in the quarter? And how much are you baking in your guidance for some of those other new products that could be material in the future?

Micah Young -- Executive Vice President and Chief Financial Officer

Yes. So Matt, we have negligible revenues from our U.S. launch of T&I this year, and that's -- we're just now launching that as we announced last quarter, building the pipeline and starting to roll that out in the U.S. So we'll see how that contracting goes and over the course of the back half of the year and on into next year.

And if we gain some new accounts earlier, that could be upside to our guidance. Same thing with Lidco is we're continuing to integrate that technology into our devices and then start to really launch that later in the year in the U.S. That could be also a source of upside later this year or even as we move into next year.

Matt Taylor -- UBS -- Analyst

OK. And then maybe just one last one. Any color on -- you mentioned some indicators that you're really seeing the broadening of monitoring throughout the hospital with the seasonality not dipping this year, and you talked about like replacements being really strong. Could you give us any sense or any other guideposts that you're looking at, feedback from customers pointing to that being durable and increasing in the future potentially?

Joe Kiani -- Chairman and Chief Executive Officer

Yes. As I said earlier, when we've been talking to our customers, we're seeing that extra monitors that were bought last year are being utilized. We once again interviewed our top 30 customers, and they're still utilizing them, not in the OR and ICU only, but outside the ICU. So we are -- I mean, if you look at our adhesive sensor growth, we mentioned what was between this year and last year.

But if you go back to 2019, when it was a normal period, not a COVID period, our sensor volumes were still up over 20% compared to Q2 2019 and we've been -- we know census isn't up that high compared to 2019, so it must be a combination of additional new customers we've attained and the continuous monitoring proliferating through the hospital's noncritical care beds.

Matt Taylor -- UBS -- Analyst

Great. Thanks, Joe.

Joe Kiani -- Chairman and Chief Executive Officer

You're welcome, Matt.

Operator

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

Jason Bednar -- Piper Sandler -- Analyst

Hey, good afternoon. Thanks for taking the questions. Just to maybe come back with the -- sorry, another quick follow-up on the gross margin side. Micah, if this was 160 bps of a greater headwind this quarter and what you were thinking, is the impact here just a surprise due to the pace of the installations being faster than what you anticipated? And then maybe, correct me if I'm misremembering, but I think your new contracting was real strong in the second half of last year.

So is this the first big impact from this contract and equipment being installed? Or was some of this weighing on past periods as well?

Micah Young -- Executive Vice President and Chief Financial Officer

No. Mike, just to clarify, when I said over 160 basis points of headwind, that's against our expectations for the quarter year over year. It was a larger headwind, over 200 basis points of headwinds year over year or more than 200 basis points. What's happening is and what we're seeing is last year was a record year in terms of winning over new customers to Masimo technology, as well as renewing existing contracts, and we saw a record first half as well.

So we're seeing an elevated number of amount of equipment that we're installing under those contracts, and that's what's putting the pressure above and beyond what we expected coming into this quarter.

Joe Kiani -- Chairman and Chief Executive Officer

Yes. And maybe this is helpful. The reason we're not capable of giving you better guidance than we're giving you right now because we've been through a period where there's changes. Last year, the changes were due to COVID rising and hospitals panicking and buying things to turn a lot of beds into monitoring beds.

And that's affected our margins because we sold, not by contract, we sold a lot of capital that have a lower margin compared to sensors because sensor volumes were down because there weren't as many elective procedures. So you have patients that would normally come in five days for elective procedures, now you have patients coming in for maybe a month or two for COVID. So you didn't see the same rate of change with sensors. So that caused, as you know, us not being able to predict the margins properly last year.

The good problem we're having again this year is it's hard for us to predict because last year was really an inflection point for many institutions that had been sitting with old competitive technology. They realized at the moment of truth, they needed us. So that plus our ability to come up with innovative products to help them, I think, has won a lot of customers over. So we're -- ended up with a record -- not only a record shipment of capital and OEM boards that we sold, but a record set of new hospitals contracting with us, which is seeping into this year.

So it's really a problem of good fortune with the margins, but that's also why it's hard for us to predict better than we predicted because we think we're still beneficiaries of that goodwill and of that moment of truth where you know what, when you really come down to it, we're the best for patient care. We proved ourselves in the NICU, in the pediatric and children area. But then when it came to adults, people used to say, well, we're not sure you make a difference. Dartmouth-Hitchcock came up with that 10-year study showing we made a difference.

And last year, they saw that we made a difference with COVID patients. So I think that's why we're ahead of schedule in things that we hadn't -- we couldn't have predicted fortunately. But that's also why we can't tell you for sure what's going to happen beyond this year. And even then, things may go better than what Micah has baked in, in new hospitals converting to us, which could improve our drivers, improve our sensor volume, but because of ASC 842, reduce our margins temporarily.

Jason Bednar -- Piper Sandler -- Analyst

Got it. That's helpful. It definitely seems like a high-class problem. OK.

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 '21 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?

Micah Young -- Executive Vice President and Chief Financial Officer

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's probably the way to look at it going forward, and we'll update you as we continue to see success in contracting.

Jason Bednar -- Piper Sandler -- Analyst

OK. All right. Thanks Micah. I appreciate it that.

Operator

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

Mike Polark -- Baird -- Analyst

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

Joe Kiani -- Chairman and Chief Executive Officer

You thought I was kidding?

Mike Polark -- Baird -- Analyst

Yes. No, here. So as you assess -- understanding it's imperfect, as you assess the surprise or the drivers of the surprise versus your prior expectation, what portion of it is replacing competitive boxes with your boxes? And what portion of it is putting boxes next to beds that didn't used to have boxes? Not year over year, but like what did you miss? What piece of that was better or is trending better than what you thought three to six months ago?

Joe Kiani -- Chairman and Chief Executive Officer

That question may imply what we said we had record-breaking new customers and renewals that 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.

Mike Polark -- Baird -- Analyst

OK. Helpful. Lidco, I heard the comment from Micah on the U.S. launch maybe later this year or perhaps next.

That seems to be a great opportunity for you. But in the meantime, I'd just be curious, is that the ex-U.S. piece contributing as expected? I think we were modeling about 1 point of revenue contribution in the quarter. Is that give or take where Lidco is?

Micah Young -- Executive Vice President and Chief Financial Officer

Yes. That's correct.

Joe Kiani -- Chairman and Chief Executive Officer

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

Mike Polark -- Baird -- Analyst

OK. The -- I want to ask about Apple. I mean I appreciate the carve-out of the new item, $5 million in the quarter. I guess bigger picture, this just seems like the third front in this --

Micah Young -- Executive Vice President and Chief Financial Officer

Mike, real quick, just to be clear, $5 million for the year. The majority of that in the back half of the year.

Mike Polark -- Baird -- Analyst

OK. Helpful. Zooming out on this, it seems to be the third front in this matter. And I'm just curious for a little more color how do you underwrite this internally, the total expense you're willing to -- the total investment you're willing to make, the potential payoffs here, the timing of visibility, any -- I get a lot of questions on this.

And I know there's a lot of fluidity and not a lot of good info at the moment, but your latest and greatest thinking on this, I think, would be helpful.

Joe Kiani -- Chairman and Chief Executive Officer

Yes. Well, we've never done a ITC before. We're familiar with patent litigation. And as you know, with Medtronic and with Philips, that ended up costing between $15 million to $30 million each.

And ultimately, it was -- we not only were able to, in the Medtronic case, enjoin the infringing product, but it led to Medtronic -- nearly $1 billion in royalties and damages. And with Philips, $300 million in damages and a new partnership that I think has been really helpful to our company. With Apple, with the trade secret and patent infringement, that is not going to go to trial probably till end of 2022, and that will be the normal cost of a patent litigation give or take some. I mean, Apple has not been easy to do things with.

They do everything they can to take away your rights to discovery, and we've been fighting that and I think we're making some headways in the court on that. But with -- and that could eventually, if we win, that could be a significant damages and who knows what else. But on the ITC case, we don't get any damages. That is purely -- we're seeking an injunction, and that will take about 18 months probably, and will probably cost $1 million a month.

And -- but we're seeking injunction of the Watch 6, which has our patented technology in it. And so that's why -- that's the summary I can give you on that.

Mike Polark -- Baird -- Analyst

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?

Micah Young -- Executive Vice President and Chief Financial Officer

Yes, Mike, as far as our traditional defense of our patents and the trademark case as well -- or trade secret, I'm sorry, trade secret, as well as the patent case, those costs are already included in our non-GAAP numbers. This is a very unique case in terms of the ITC, the complaint that we filed, which represents a pretty significant spend over a very pre-defined period of time. It's a very short duration of time, call it up to 18 months. So that's why we're excluding that and giving you visibility to the spend related to the ITC.

Mike Polark -- Baird -- Analyst

Thank you.

Operator

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

Unknown speaker

Hey, Joe, Micah. Gavin here for Ravi. I wanted to talk a bit about hospital automation a little bit more. We discussed it kind of in detail under the 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.

Joe Kiani -- Chairman and Chief Executive Officer

Well, hospital automation is going very well. People are seeing the value -- you saw the study maybe that we did a press release on that showed there's less nursing time at the bedside, which, of course, helps with dealing with any disease, especially an infectious disease like COVID Delta variant. And then as far as the business is going really well, our -- the way we kind of track this is the driver shipment and then there's annual revenues. I know we had some really good quarters in terms of driver shipment and that has continued.

But I know from a annual revenue increase, it's been double digit, maybe close to 30% growth this quarter compared to the same quarter a year ago.

Unknown speaker

OK. 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 caught on 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.

Micah Young -- Executive Vice President and Chief Financial Officer

Well, sounds like you've been talking to some of our customers. We have not only a better technology for cardiac output minimally invasively done. That's one reason we bought Lidco, then the leading company in the space, but we also have a better cost and cost of ownership proposition for our customers and it's gone really well. Customers are happy to see Masimo backing Lidco because even though in the past, Lidco always won clinically, they were such a small company, customers were afraid of taking a chance on them.

So like I said in many ways -- revenue-wise, it is what it is, we said it's about a point. But in many ways, it's been better than we expected as far as customer excitement and acceptance.

Joe Kiani -- Chairman and Chief Executive Officer

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

Operator

Mike Matson, your line is now open.

Mike Matson -- Needham & Company -- Analyst

Yes. Thanks. So I guess I have one -- yet one more on gross margins. But putting us on this mix issue and the board issue, I wanted to see if you could just comment on any other kind of drivers of gross margin over the next few quarters.

I know the RD sensor, I think in the past, that was helping your gross margin. I don't know if that's run its course? And what about the other new products you've launched and things like inflation, etc.? What are the kind of puts and takes there for gross margins aside from this mix issue?

Micah Young -- Executive Vice President and Chief Financial Officer

Yes, Mike, if you kind of strip out the headwinds from the higher monitor installations for the balance of the year, we continue -- as we see rebounds in elective procedures and how our SpHb, O3, SedLine, those things are kind of connected more to those rebounding surgeries. That will give us a nice mix benefit. And then if you think about the RD as we convert more to RD sensors, the higher quality sensor, but we have some better margins on that sensor and that should continue to drive improvements in gross margins. And that's why we have that long-term plan as we try to drive our gross margins to 70% over time.

Those are some of the key drivers to that improvement.

Mike Matson -- Needham & Company -- Analyst

OK. And then as far as the Opioid SafetyNet launch in Europe goes, what's the initial plan for -- who's going to be paying for that? Is it going to be an out-of-pocket purchase? Or do you have any plans to seek reimbursement or have insurers pay for it?

Joe Kiani -- Chairman and Chief Executive Officer

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. 

Mike Matson -- Needham & Company -- Analyst

OK. Thank you.

Joe Kiani -- Chairman and Chief Executive Officer

OK. I think last question is from Marie Thibault.

Operator

Marie Thibault, your line is open.

Marie Thibault -- BTIG -- Analyst

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.

Micah Young -- Executive Vice President and Chief Financial Officer

Yes. Marie, I'll comment first and then Joe can add. If you look at our guidance for the year, we're raising it by $11 million, and that's in excess of how we exceeded expectations in the second quarter, and it really reflects the additional level of driver shipments for the back half of the year. And of course, as you know, we're being thoughtful and prudent about our guidance.

We're still in the first half of the year and coming out of a pandemic from -- we're just being thoughtful and you could say I'm somewhat conservative and provide high confidence guidance. So that's how you should think about it.

Marie Thibault -- BTIG -- Analyst

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.

Joe Kiani -- Chairman and Chief Executive Officer

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 and 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?

Micah Young -- Executive Vice President and Chief Financial Officer

Yes, around 30%.

Joe Kiani -- Chairman and Chief Executive Officer

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

Marie Thibault -- BTIG -- Analyst

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

Joe Kiani -- Chairman and Chief Executive Officer

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.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Eli Kammerman -- Vice President of Business Development and Investor Relations

Joe Kiani -- Chairman and Chief Executive Officer

Micah Young -- Executive Vice President and Chief Financial Officer

Rick Wise -- Stifel Financial Corp. -- Analyst

Matt Taylor -- UBS -- Analyst

Jason Bednar -- Piper Sandler -- Analyst

Mike Polark -- Baird -- Analyst

Unknown speaker

Mike Matson -- Needham & Company -- Analyst

Marie Thibault -- BTIG -- Analyst

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