Masimo Consumer the new Sound United business, has seen both revenues and profits smashed with management claiming that sales are continuing to slow after third quarter sales fell 23% and profits 28%.

Operating income came in at US$25.2 million, down US$29.6 million or 54% below the operating income of $54.8 million in the second quarter last year.

Net income for the quarter was US$10.6 million which is $27.3 million or 72% lower than the net income of $37.9 million in last year’s quarter.

Masimo management has also revealed that it has been losing money ever since it acquired Sound United.

The Companies health care business is also struggling with revenues falling from US$327M in the last quarter 2022 to US$307.8M in the latest quarter.

Overall revenues were down 13% and net income down more than 72% but there is one consolation, Masimo CEO Joe Kiani is predicting that next year will be “great”.

He said, “We are disappointed with our results this quarter.”

“Our performance for the third quarter was within our guidance range communicated last quarter.”

Masimo’s business is comprised of two major divisions – healthcare and non-healthcare.

The non-healthcare division, known as Masimo Consumer, is the business the company acquired when it purchased Sound United with the Australian operation of the Masimo consumer business also reporting a steep fall in revenue and profits.

Commenting on the audio business Masimo management claimed that they “saw continued slowing in demand for consumer audio products. A difficult environment for consumer discretionary purchases is adversely affecting the market for high-end audio systems.”

Both CEO Joe Kiani and CFO Micah Young told analysts that they are “beginning to see improvement” in the post-COVID period in which most businesses – such as those with whom Masimo does business – are forced to adjust to a lower demand environment.

According to analysts the company is experiencing margin compression on multiple fronts.

When the company acquired Sound United for over $1 billion in cash, they didn’t realize that the consumer electronics industry is a higher cost, lower margin industry, compared to the commercial healthcare business.

This instantly created a disparity in realizable margins with a big differential between the two divisions.

For example, healthcare gross margins come in at 60% and non-healthcare gross margins at 33%.

Also impacting the business is their battle with Apple.

While they won the latest round legal costs are mounting with Apple tipped to appeal.

Masimo recently won a favourable decision in a US Court that could see a ban the importation of Apple Watches in the U.S.

This was probably the most positive news to come out of the presentation.

Some analysts are forecasting that the win could be worth an additional US$100 million in revenues to the company, year over year.

Despite the win Masimo is still fighting multiple lawsuits in multiple district courts, and appeals courts, as well as actions with the U.S. Patent and Trademark Office, the Patent and Trial Appeal Board, and the United States International Trade Commission over the theft of their Oxygen measurement technology.

In the third quarter of this year, the company spent US$6.7 million on legal costs.

Litigation insurance paid $5 million of that amount, but the company still had another $1.7 million of direct impact from legal bills.

Previously Apple had been successful in getting the US District Court to invalidate claims for nine Masimo patents.

Masimo has appealed this ruling and Apple has appealed the ruling on its successful claims on three of its patents.

Masimo financed its US$1 billion purchase of Sound United with debt and due to inflation pressures the business is now having to pay higher interest rates, with analysts predicting that the acquisition remains a problematical issue for Masimo management, due to a slowdown in sales going forward.

The downturn in the market for consumer discretionary purchases is adversely affecting the market for high-end audio systems with their premium products selling better than their mass market affordable premium products.

One market where Masimo is doing better than in the audio market, is in the hearables category, which increased by more than 140% year-over-year and now represents 10% of segment sales.

The positive momentum in hearables has helped to partially offset the macro conditions weighing on the market for high-end audio systems.

In its 10-Q report to the US Securities and Exchange Commission (SEC), the company reported that from April 11, 2022, to October 1, 2022, the audio division booked revenues of $430 million and generated a net loss of $26.7 million.

This year, from January 1, 2023, to September 30, 2023, the division generated revenues of $562.1 million and had a net loss of $21.2 million.

Investors were not happy with the acquisition of Sound United as a result Masimo stock remains well below its historical highs.

To investors, it seems like all Masimo succeeded in doing is acquiring a company to dump Masimo money into rather than to generate profits out of claims Strata Gee.

During the Masimo conference call Michael Polark, from Wolfe Research asked the Masimo CEO if Sound United is a ‘distraction.’ Is it creating opportunities?

He replied, “When we announced we’re going to acquire Sound United, I said, give us three years, and if in three years it’s not working, we’ll get rid of it,” Kiani said.

Kiani claims that by acquiring Sound United and having them lead the charge into the consumer channel, the healthcare side of Masimo can stay focused on continuing to build the healthcare business.

“Not only is Sound United a distraction…they are actually preventing the healthcare division from being distracted as the company moves into the consumer channel” he said.

The CEO also maintains that Masimo could not ignore the consumer channel any longer, because “healthcare is moving into the home.” He says the division is excited to be a part of Masimo and a part of this major trend of healthcare moving into the home.

Regarding the Sound United management and employees – Kiani said, “We did not hear from them, ‘Hey, leave us alone. We just want to sell speakers and AVRs.’ On the contrary, they’re excited about being part of Masimo helping people live better lives.”

“Please hang in there” Kiani pleaded to analysts.

“I really think this is the right thing for Masimo.”