Q2 2021 OSI Systems Inc Earnings Call
[music].
Okay.
Ladies and gentlemen, thank you for standing by and walk us through the OSI systems.
Second quarter 2021 conference call at this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press Star then one on your pet telephone.
On today's conference call is being recorded I will now turn the conference would be how would you say.
Island, Edric, Chief Financial Officer, Sir you may begin.
Thank you.
And thank you for joining us on Melon, Edric executive Vice President and CFO of OSI systems, and I'm here today, with Deepak Chopra, our president and CEO low.
Welcome to the OSI systems fiscal 'twenty, one second quarter conference call.
We are pleased you can join US as we review our financial and operational results and discuss our updated outlook for fiscal 'twenty one.
Before we discuss our Q2 results I would like to remind everyone that today's discussion will include forward looking statements and the company wishes to take advantage of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with respect to such forward looking statements.
All forward looking statements made on this call are based on currently available information and the company undertakes no obligation to update any forward looking statements based on subsequent events or new information or otherwise.
During today's call, we refer to both GAAP and non-GAAP financial measures when describing the company's results for information regarding non-GAAP measures and GAAP measures of the company's results and a quantitative reconciliation of those figures. Please.
These refer to today's earnings release.
I will begin with a summary of our financial performance for the second quarter of fiscal 'twenty one.
And then turn the call over to Deepak for an overview of the business on.
I'll, then finish with more detail regarding our financial performance.
And a discussion of our updated outlook for fiscal 'twenty one.
As the COVID-19 pandemic continues to impact the global economy, our priority at OSI items.
<unk> remains the delivery on commitments to our customers and to our partners, while ensuring the continued safety of our employees.
Now, we will jump into some higher up into some highlights.
First we achieved record non-GAAP fiscal Q2 earnings per share of $1 35 up 6% from Q2 of fiscal 2020.
Despite the adverse impact on security division revenues of the ongoing pandemic.
Second we reported a record Q2 adjusted operating margin of 13, 8%, a 140 basis point increase from 11, 6% in the same period last year.
Third bookings were solid in the second quarter, continuing our momentum our momentum from the previous quarter.
Our book to Bill ratio was one one in fiscal Q2 and one three for the first half of fiscal 'twenty, one leading to a 20% increase in backlog since the start of the fiscal year.
And finally cash flow conversion was again strong Q2 operating cash flow was $36 million in operating cash flow in the first half of the fiscal year was a record $89 million.
Before diving more deeply into our financials, let me turn the call over to Deepak.
Yes.
Thank you Adam.
And thanks to everyone joining us on today's call.
During the second quarter of fiscal 'twenty, one as Alan has mentioned we achieved record adjusted earnings.
And had strong cash flow and.
And we ended the quarter with a backlog in excess of $1 billion.
We had a healthy backlog and a solid overall first half performance, we enter the second half of fiscal 'twenty, one with confidence.
Let's take a look at each division's performance in the quarter, starting with our security Division.
Security bookings in the quarter.
$164 million.
Presenting an approximate one to one one book to Bill ratio.
As we have mentioned on the earlier call. We expected Q2 revenues in the security Division.
On <unk> to be impacted by the endemic and this was indeed the case.
Although the bookings have been strong in each of quarter, one and quarter two debt.
Has been difficulty in converting some of the backlog to revenue given the travel restrictions, which impede installations and southern factory on site acceptance tests.
Our security team has remained focused on customer service, capturing new opportunities and strong operational execution.
We believe revenues will accelerate in the second half of the fiscal year.
We booked several opportunities and cargo screening and aviation detection in the second quarter.
For ports and borders during the quarter.
We announced at $39 million order from an international customer to help protect its critical infrastructure by providing several platforms of rapiscan ex shrank cargo and vehicle inspection systems, and both fixed and mobile configurations.
Along with ongoing maintenance.
We also announced a $12 million international order.
To provide multiple units of the Z portal, a high throughput drive through inspection system and the widely used Z BV mobile inspection systems, which can be rapidly deployed to provide flexibility and relocating to guarantee checkpoints.
This order also includes follow on maintenance service and product support.
We secured another order for $10 million for <unk> and related maintenance service and support.
Continued to see a strong international pipeline for ports and borders, especially in the Middle East and Asia.
We believe that the U S spending for border security, especially on the southern border.
We'll also be reinvigorated with the election cycle behind us and continued bipartisan support for security and technology.
Global Air passenger traffic is rebounding Albert slowly.
While some airports have pushed out deliveries airports in certain regions continued to push for infrastructure upgrades to meet the latest security screening requirements.
For aviation detection products, we announced a couple of our wins during the quarter.
We received a $13 million order to provide airport screening products, including our 920 checkpoint CD baggage scanner on.
On baggage scanners, and <unk> 900, and walk through metal detectors.
Thought a scandinavian airports.
We are somewhat awarded a $6 million order to upgrade aviation checkpoint inspection systems for another customer.
R&D on in quarter, two we announced contracts that were received at the end of quarter, one from an international government customer for approximately $93 million to.
To provide various ex a cargo and vehicle inspection systems baggage and parcel inspection systems trace detection systems and follow on maintenance and support in.
In security our approach to offer a broad portfolio of solutions to our customers has really helped us debt.
<unk> in the marketplace.
In the first half global logistics providers.
We're very actively seeking our BPI and <unk> solutions for air cargo.
As they continue to expand and upgrade security infrastructure to handle increasing E commerce demand, thereby increasing our opportunity pipeline.
For turnkey services.
Our Albania and Bureau day, Cooperations continued to do well and the newest project in Guatemala at the Port of Center Tomas <unk> operations, a few months ago with scanning volume currently ramping up.
Our security Division also continues to work on development of New security solutions, especially in the areas of checkpoint security.
Cargo and Waco scanning enhanced detection software and AI based automated threat detection solutions.
Overall.
We believe the performance of the security Division in the second half of fiscal 'twenty one.
We'll be stronger than the first half performance as we see a growing pipeline of opportunities and have a significant backlog.
Moving to our Optoelectronics division that continues to deliver strong results Q2 revenues of 88 million represented a new record.
And a 20% increase over the same period in the prior year.
During the first half of fiscal 2021, the team managed through the pandemic induced operational disruptions at various regional sites to meet customer needs and help grow the top and the bottom line.
Auto continues to grow business with both new and existing customers, particularly in Asia and the U S.
As an example of a notable win with a new customer op total received an order for approximately $6 million to manufacture led.
Led lighting electronic components for a leading OEM.
Up those bookings were solid and.
And we ended Q2 with a record backlog in the division.
<unk> was 16% higher than the <unk> backlog at the end of fiscal 'twenty and up sequentially over the 2021 first quarter.
The team will continue to focus on opportunities to leverage on existing channels and manufacturing infrastructure in the U S Europe, and the UK and southeast Asia.
We anticipate that this division will continue our strong momentum toward the second half of the fiscal year.
Moving on to the healthcare Division.
<unk> reported revenue of $55 million or 13, 1% higher than the same period a year ago.
We have been working over the past year to improve operations and bring in new sales and marketing talent in the healthcare division and both initiatives were crucial in driving the division's Q2 performance.
As the team ramped up sales efforts order fulfillment and service to handle increased volume.
During the fiscal 2021 first half demand for patient monitoring was boosted by the tail winds from the pandemic.
But we simultaneously also encountered some headwinds in our cardiology business as customers focus more on COVID-19 related treatments and procedures.
As more of the population receives COVID-19 vaccinations, we believe that the diagnostic cardiology product line could benefit based on pent up demand.
Furthermore, we have plans for several new cardiology cardiology product introductions in the near term and we continue to develop the next generation of patient monitoring platform.
We are proud of the accomplishments of the entire healthcare team and his continued support of the hospital customer base facing the unprecedented pandemic challenges.
Overall, we are pleased with our company's fiscal $2 21 first half performance.
While the security Division faced revenue headwinds as we anticipated the team has done an outstanding job booking new business driving new product innovation and positioning itself for a stronger second half.
The Opto Division continues to deliver strong performance as it benefits from a blue chip customer base of leading Oems in diversified industries, such as aerospace defense automotive industrial and health care.
And the healthcare division's focus on customer and operational execution is paying off with the ability to profitably handle significant increases in demand.
Looking ahead.
Debt to maintain our focus on meeting our customers' needs, while protecting the safety and our pump on employees.
I am truly proud of our OSI team and I look forward to the second half of our fiscal year.
I will now turn the call back over to Alan to further discuss our financial performance before we open the call for questions. Thank you.
Thank you Deepak So let's review the Q2 financial results in some greater detail.
Our revenues in Q2 of fiscal 'twenty, one were $276 million as compared to $305 million in the prior year Q2.
Similar to Q1, we reported strong sales growth in the healthcare and opto divisions, but a reduction in revenues and security due in part to the effects of the pandemic.
Let's dive deeper starting with the health care Division, whereas Deepak mentioned revenues increased 31% year over year with strength in many major geographic sales channels across our portfolio, including patient monitoring supplies and accessories and service.
Auto sales were again strong with Q2 third party sales up 25% year over year due primarily to organic growth.
And supplemental supplemented by incremental revenues from a small acquisition completed in the second half of fiscal 'twenty, which accounted for approximately 4% of the 25% auto growth.
And as expected we saw a reduction in revenues in the security division with sales down 28% year over year, largely due to the continued impact of the pandemic on certain aviation and cargo customers.
Security bookings were solid with a book to Bill of one one for the second fiscal quarter and one five for the first half of the 2021 fiscal year, leading to further further growth in backlog.
The Q2 gross margin of 37% was 70 basis points higher than the Q2 fiscal 'twenty margin of 36, 3% driven.
Driven by margin expansion in each of our health care Division, which generally carries a greater gross margin than our other two divisions.
And our security Division.
Partially offset by the impact of the strong relative growth in revenues and the optoelectronics and manufacturing division.
Which historically tends to carry a lower gross margin than the other two divisions.
The increase in the health care gross margin was primarily due to economies of scale associated with the strong Q2 revenue increase.
The gross margin an improvement in security.
It was driven by a favorable revenue mix and the continued focus on operational execution overcoming lower sales.
As mentioned on previous calls.
Our gross margin will fluctuate from period to period.
Based on revenue mix and volume among other factors.
Moving to operating expenses.
In response to the pandemic the company adjusted its cost structure towards the end of fiscal 'twenty and has continued to make such cost adjustments in fiscal 'twenty one.
This has contributed to a 12% decrease in Q2 SG&A expenses year over year.
We worked diligently across each of our divisions to improve efficiencies and prudently manage our cost structure.
R&D expenses in Q2 was $13 8 million representing.
Representing a year over year decrease of 7%.
We continue to dedicate considerable resources to R&D, particularly in security and health care as we remain focused on innovative product development, which we view as important to the long term success of our business.
Moving to interest and taxes.
Net interest and other expense in Q2 of 'twenty, one decreased to $4 2 million from $4 $8 million on the same prior year period.
As a result of reduced borrowings in light of our strong cash flow in a declining interest rate environment since last year.
On the tax side, excluding the impact of discrete tax items.
Our effective tax rate in Q2 of fiscal 'twenty, one was 27, 5%.
Compared to 27, 7% in Q2 of fiscal 'twenty.
We recognized discrete tax expenses of <unk> 3 million in Q2 of fiscal 'twenty, one compared to a zero point $7 million discrete tax benefit in the comparable prior year.
As a result, we reported a tax provision under GAAP of 28, 8% in Q2 of fiscal 'twenty, one compared to 25, 3% in Q2 of fiscal 'twenty.
So now, let's turn to a discussion of our non-GAAP adjusted operating margin.
For a reconciliation to the GAAP figures, please see our press release.
Overall, our adjusted operating margin increased from 11, 6% in Q2 of fiscal 'twenty to 13% in Q2 of fiscal 'twenty one.
We were very pleased with the significant margin expansion.
Especially in the face of overall topline headwinds and.
In fact, the 13% adjusted operating margin is the second fiscal quarter record for OSI.
The non-GAAP adjusted operating margin in our security Division came in at 15, 7%.
In the latest quarter right in line with the prior year second quarter, driven by a favorable mix of revenues sound operational execution and cost control actions.
Our healthcare Division reported significant expansion of the non-GAAP adjusted operating margin.
From three 1% in Q2 of last year to 17, 4% in Q2 of fiscal 'twenty one.
Due in part to leveraging that fixed cost structure with improved sales and sound operational execution.
The increases in the security and healthcare margins were partially offset by average by a reduction in the adjusted operating margin in our Opto Division.
Which decreased from 13, 5% in Q2 of the last fiscal year to 12, 8% in Q2 of fiscal 'twenty, one primarily driven by a less favorable mix of customer revenues.
Moving to cash flow we.
We continue to generate significant cash as Q2 operating cash flow of 35 million brought the total for the first half of fiscal 'twenty, one to a record $89 million.
This was achieved as we invested in an increased inventory in preparation for sales growth, while also experiencing elevated DSO due to timing of collections.
The receipt of a significant customer advances primarily associated with new international security wins helped to offset the investment in inventory.
And change on DSO.
Capex in the second fiscal quarter of 'twenty, one with $4 7 million, while depreciation and amortization for the quarter was $11 2 million.
Our cash flow conversion continues to be quite solid.
Our balance sheet is strong with.
With modest net leverage and no significant debt maturities until fiscal 2023.
Finally, turning to guidance.
We are increasing revenue guidance for fiscal 2021 to the range of 111 billion to 114 5 billion.
From $1 1 billion to $1 42 billion previously.
Similarly, we are increasing our non-GAAP earnings per diluted share guidance to the range of $5 to $5 35 per share from $4 65 to $5 10 per share previously.
The non-GAAP diluted EPS range excludes potential impairment restructuring and other charges amortization of acquired intangible assets and non cash interest expense and their associated tax effects.
As well as discrete tax items.
We currently believe this revenue and non-GAAP earnings guidance reflect reasonable estimates.
And we have included the anticipated impact of the COVID-19 pandemic in our guidance.
Given uncertainties as to the duration and scope of the pandemic as well as other variables. However, the extent to which COVID-19 may impact the Companys financial results is difficult to predict and could vary materially from the anticipated impact thereof. Currently reflected in our estimates and guidance actual revenues and non-GAAP earnings per diluted share.
Could also vary from the anticipated ranges due to other risks and uncertainties discussed in our SEC filings.
In the face of challenging times, we remain steadfastly focused on the growth of our business.
Through investment in product development and strategic acquisitions, while also managing our cost structure.
We believe these efforts should enable OSI to continue our leadership in providing innovative products and solutions.
Finally, and importantly, as Deepak mentioned wed like to take this opportunity to thank the global OSI systems team for its dedication and supporting our customers and contributing to the creation of value for our stakeholders, while maintaining our commitment to safety in the face of uncertainty.
At this time, we're happy to open the call to questions.
Thank you.
Ladies and gentlemen, we would like to ask a question on coal prices.
Star then one on your point on power.
Zone.
To ask a question on Compressco.
Alright on one one moment please.
Question comes from Jeff Martin of Roth capital more in Florida.
Thanks, Good morning, Deepak good morning, Alan.
Good morning, Jeff.
Okay.
Was curious if you could.
Give us some additional insight into what youre seeing in the security segment in the second half relative to the first half what are the key swing factors that give you confidence that you'll see an acceleration on the second half.
Good question Jeff.
As Deepak here.
One other things that Ive mentioned on add on as mentioned, we're entering the second half with a very strong backlog.
Bookings have been very strong in Q1 and Q2 in severity.
And we expect.
Ted we will stock.
Shipping some of that stuff that has been challenged in the first half.
Number two.
All other indications our pipeline continues to be strong.
Both internationally and domestically.
And I also mentioned that we.
With the change of administration in Washington.
Some of the <unk>.
Bipartisan support is coming to reallocate some other funding from the border wall into technology and non interest of equipment.
Which we are very well placed with and have a great relationship with DHS.
Okay and along those lines.
Could you give us some relative perspective as to how much say on the last 12 months or last year.
On the customs and border inspection in the U S contributed <unk> <unk>.
Talking about going from very little to potentially a significant amount over the next 12 to 18 months perspective, there would be helpful.
Our GAAP you know, we don't break it down but we have said on the previous conference calls.
Already last year even.
DHS CBP data budgets had gone up quite a lot.
And we think continued strength.
He will remain in that place.
To upgrade technology and to bring more technology based platforms at the border.
Point inspection.
Okay and then my second question is on the Health care segment could you give us some.
Relative perspective on what your expectation is for the second half of fiscal 'twenty, one and health care relative to the first half obviously patient monitoring spin.
Nice contributor in the first half on that.
It may not be as strong in the second half, but cardio may pick up.
Help frame for us what do you expect it to be flat up or down relative to the first half.
Hey, Jeff This is Alan I'll take that question.
Of course, we provide guidance overall by for the overall company of OSI systems as opposed to division, but kind of given you a little color.
We expect to see continued strength in the health care business here on our third quarter.
There is so much uncertainty at the time, given COVID-19 and the pandemic that looking out beyond that is difficult to say, but overall, we're seeing continued strength of our health care business and we think that will continue.
Really pleased with the improvements made by our leadership team at space Labs, and we expect that to reap dividends for us.
For the future.
Okay, Great and then last question in terms of capital structure.
Down roughly $30 million of debt in the quarter cash.
As on the down.
Minimally just curious if we should anticipate continued debt reduction.
Looking at capital allocation, because we are generating significant free cash flow.
Sure. Jeff This is Alan Youre, absolutely right. The cash flow has been excellent and our capital allocation strategy is multi fold. We we look at we look at acquisitions, we look at new turnkey projects, we look at stock buyback and we look at any residual paying down our debt and the nice thing for US is we don't necessarily think they're mutually exclusive.
And this past quarter. It was more on the on the debt pay down side in the previous quarter. There was a small acquisition coupled with significant stock buyback.
We expect to continue to be a nice cash flow generator and be able to play in and all of those areas that I just mentioned.
Okay. Thanks for taking my question and congratulations on a on a nice earnings quarter.
Okay.
Thank you. Our next question will come from Larry Solow.
Good day and Securities Your line is open.
Hi, good afternoon, or good morning to you guys.
Congrats on a good quarter.
Last question I have one on the security piece.
You mentioned.
Better mix benefited us this quarter.
You have mentioned cost cutting on a couple of quarters.
Just trying to get my hands around the revenue declined about 30%.
I've mentioned able to keep your margin operating margin.
Flat year over year, which is pretty remarkable.
As revenue coming back on.
Without giving the actual numbers.
I suppose we should see operating margin continue to rise and rich.
Perhaps significantly above where we all have always on guidance.
Larry This is Alan good observation and good question.
Absolutely and our team has done an excellent job.
On maintaining margins with the change in revenue and you are right as margins move up excuse me as sales move up we would expect margin expansion as is our goal as well and we think theres significant opportunity to do that.
Of course, some of the changes that we've made are more structural in nature and are permanent reductions while others like most companies. There are some temporary benefit for maybe some reduced travel savings and some things like that but absolutely. We do believe there is opportunity for operating margin expansion in our security business.
And we're planning on that.
Okay.
And you mentioned.
I know you had several contract wins recently at any of these contracts with any of these newer business wins contributed in the quarter or.
Now on the security side.
So the larger announcements that we made in that Deepak referred to will really be more on our second half and even somewhat in Chicago thousand 22. So this past quarter was principally for for wins that we had before besides a smaller book and ship business.
Got it and you mentioned in Guatemala started to ramp.
Is there any way to sort of characterize that a wall.
Have you sort of laid out cost ahead of the revenue should we.
Starting to see more ryzen contribution for that question on the bottom line flow.
Quarters.
Yes, that's a correct statement. So we have been ramping up on our revenues for Guatemala and expect to be at.
Near full run rate before the end of the fiscal year.
And you are right some of the costs that you put in are relatively fixed nature.
So they come in in advance of being at peak revenues. So, yes margin should increase relative to that project for us as volumes ramp up.
And the drop in service revenue this quarter.
Sort of picked up a little bit relative to Q1.
I think service revenues were down mid teens in overall revenue.
Revenue was only down on the high singles is that I assume mostly from the security segment.
No partially related maybe to Mexico, but debt.
Just utilization staff and service up should we expect some of that will start to rebound as we look out.
Yes, good question again, Larry the.
The drop in service revenue was almost entirely related to Mexico. So.
We will lap in June so as we move into fiscal 'twenty. Two yes, we would expect to see a rise in the in our service revenues year over year, but we'll have another quarter or two of that same scenario relative to service revenues.
Okay.
And you mentioned.
Pretty significant growth in health care, the 30% number.
I think <unk>.
Q2, normally seasonally stronger quarter.
Any way to sort of parse out.
The benefit from global view.
It sounds like.
Seem to be outweighing, the cardio the slowdown on cardio, but maybe not just trying to parse that out or maybe you could help us how much is cardiology roughly can you tell us represent in terms of segment revenue.
So Larry this is Alan So cardiology, Inc.
<unk> some of the ancillary services is about a quarter of our revenue.
After your business overall.
Okay and.
On the Covid benefit do you see those continuing.
Do we.
Or is that something that may even with COVID-19, continuing I don't know how hospitals are they continuing to purchase monitors or will become a point where.
They only have so many debt for monitors rightful.
Larry This is deepak here.
Add on as mentioned.
It's very difficult to predict it.
We've had a very strong couple of quarters.
An add on as also mentioned Q3 continues to show strength.
Delete Q4.
All in all we think that this stays on.
Ongoing.
And it's not just in U S.
Canada and other parts of the world.
And cardiology, we think will pick up so all in all we think that the health care will continue.
To do well, but definitely we are not saying in any shape or form that again continue with a 30% growth that we've seen.
But the other side.
On the other side on security.
We think gives us do better than in second half and the Optoelectronics. Alan has mentioned continues to show very very good performance.
Looking at healthcare you don't think.
Noting any type of well.
But where you might see a significant pullback.
From.
Maybe perhaps talk further the hospital side <unk> for a few quarters is that something that you think is at risk or not necessarily.
We don't see any we don't see any major pullbacks and stuff like that at the same time remember we also spending a lot of R&D money to develop new products and those products will start being implemented in cardiology as specifically.
And later in the second half and as we go into the next years.
The new platform that we're working on and monitoring should start seeing some big traction.
Okay, Great got it okay, great. Thank you very much I appreciate it.
Thank you our next question comes from.
Glenn of Oppenheimer. Your line is open.
Yeah. Thanks, good morning.
So was curious about the.
Cardiology commercialization process with the new products coming I think there is a focus in North America I'm wondering how the kind of channel conditioning is going what you are.
On the site is on converting the commercial aspect.
Independent isolating out the pandemic timing type.
Dynamics.
Hey, Chris This is Alan really good question, Yes, we're really excited about the opportunities in cardiology, we brought on a new commercial team for North America, and the United States, specifically as you're referring to so we have a new vice president of Cardiology sales, who who came on board and he has recruited.
Some new members to his team and the timing couldn't be more perfect. So as these new products begin to come out here predominantly in our in our fourth quarter fourth fiscal quarter and beyond it's just a perfect time to start ramping up for cardiology.
As Deepak mentioned, we expect some some increasing levels of demand for some of the existing products.
As we come out of the pandemic as well as coupled with the new products. We expect this to lead to some significant growth in cardiology sales, particularly in the U S, but really on a worldwide basis and one of the nice things about that is cardiology represents our highest margin product in health care frankly, it's our highest margin products in all of our.
OSI systems, so as cardiology sales ramp theres, a real nice pull through to the bottom line both for the division in the company overall.
Yes.
Just to add on add on to what Alan said.
On the other thing Thats, there is a change happening in the marketplace.
That most people are looking at remote monitoring.
Home monitoring GAAP.
Kelly services on new products and stuff are basing on cloud computing and we are very much focused on to this new trend that's coming in there people don't want to visit hospitals, but don't want to go there. So they can do the monitoring from home and the doctors can go back and we are very much engaged index.
Thanks for that follow on.
Had a question on inflation.
Curious.
How you manage.
Whether through hedges are pass through and.
Backlog that's already booked.
As when we have an inflation ramp on the economy.
Yes, Chris this is Alan so we have not tended to see any material impact from inflation.
When there can be some inflation, we our supply chain also does.
Good job managing cost reductions in other areas. So overall, we do not view on inflation as a as really a significant impact to our company overall.
Great Thanks for that.
Our next question comes on.
Okay.
Yes, Thanks for taking my question commendable job, specifically on the operating margin side guys.
Looking here I did want to ask on some of the questions I had have already been addressed.
But looking at how strong the Opto division has been we've been hearing a lot of things.
Thing Thats about shortages in high demand out of that area is there any.
Elaboration you can provide about specific areas of strength, whether it's specific products and demand, whereas that feeding into from like a geographic region.
On good question.
Infinitely yes, youre right the reading right.
A lot of people were having shortages and stuff we don't see much about it will be a very fortunate that we are vertically integrated company.
The demand that we're seeing is on a very broad industrial platform.
Obviously, the number one platform that's showing a significant demand is from our healthcare.
We are very much into the healthcare OEM products.
Livestock cemetery and other areas all debt.
Debt supply to other people.
Our aerospace defense and the answer to your question is in this particular cash it's pretty much more on day, one of them and from U S. Non of demand in Asia.
Even in Europe.
Yes, there are some challenges out there.
We are proud of our customer base one on the bench strength, we've always had on that auto product line, we have a very broad customer base and one of the other areas, which are doing very well is in the automotive industry.
Adjusted just add on our biggest strength has been out of our Asian operations.
And the greatest growth is what Deepak just mentioned and in automotive as.
As well as in some of the defense business. So the broad based nature of what we do has been extremely helpful for us.
Thanks, guys.
A full detail on that front and glad to hear that you guys are well situated as vertically integrated player in that space.
Fair to say now that you've had a couple of these turnkey as rollout also right and you're ramping up now.
The services revenue is probably kind of bottomed in <unk> and probably going on.
Ramping up a little bit more as we move through debt following back half of this year.
Josh This is Alan.
Thats generally a correct comment I think what we're going to see where youll see the growth in service tend to occur probably as we enter our fiscal 'twenty two here in about six months.
As we'll continue to have those tough year over year comps in service for Q3 and Q4. So we would expect the growth to begin starting fiscal 'twenty two.
Okay. Thanks, and then last question for me.
Thank you guys are according to my model at least it looks like youre going to be under one times net debt EBITDA levered by the end of the year. So.
Clearly a lot of opportunities for you guys whether that share repurchases are looking at some strategic M&A as well.
One of the things I think that people would like to see.
I'm wondering about is.
What needs to happen or how could the country kind of potentially accelerating the topline growth thinking more about next year.
Ill pass those year over year comps kind of day.
A low double digit revenue and get out of the mid high single digit growth category on what's the opportunity to improve on that guidance.
Hum.
Good question on more answer in a broader sense and then maybe Alan can jump in.
Basically our focus is on backlog is very strong on pipeline is very strong, especially in security.
And as the pandemic settles down is the vaccination comes into place more travelers has started we will start seeing some big infrastructure investment from airports and ports and stuff.
Especially United States. So we think that's going to be the gross carrier and security Opto will continue to do well.
As it's a very broad product line and healthcare add on as mentioned, though definitely and that kind of growth in patient monitoring might slowdown, but cardiology is there and the most important thing is debt as a company. We've also been very acquisitive, we look at acquisitions and we'll continue to look at it with a strong balance sheet.
Talent.
Yes, I would echo with Deepak said, we have a strong funnel of opportunities ahead of us to drive good solid organic growth but.
Leveraging on your comment Josh we do have a very strong balance sheet with low net leverage M&A acquisitions have played a big part of our strategy over the last 10, or 15 years and wed like to bolster or supplement that organic growth with some acquisitions as well so.
The combination of those two can get us to a more accelerated revenue growth as you were suggesting.
Thanks, guys I'll hop back into queue.
Thank you. Our next question comes from Greg Konrad of Jefferies.
On the telephone.
Hi, good morning.
Goodbye.
We've talked a lot about new product development on the healthcare side is there any way to think about as these new programs roll out how much is kind of replacement versus incremental opportunities and kind of expanding your total addressable market vs.
Replacement products.
Again, good question does Deepak here.
On bolt on the cardiology side, it's add on products.
Cloud computing.
Elite products related.
And though we're not going to start getting executed in the next couple of months regarding the patient monitoring side, we are investing largely for our new platform and that's going to take some time and that will go into both combination of replacement and we also saw as saying we ought to be called them conversions.
Where because of the good good.
On activity story good partnership.
Better better price to performance, we think that we will get some replacement.
Versions ourselves so that will be the growth path.
That's helpful. And then I mean, you've always talked about healthcare being the highest contribution margin of the business and I think 50%, 60% is the number that you guys have thrown out and you've kind of seen that play out in the last three quarters. Any reason to think that trend changes in terms of drop throughs or is that level kind of <unk>.
Hannibal as we go forward.
Greg This is Alan.
We believe that the contribution margin that you've seen in health care, our R&D sustainable it always depends upon the mix of revenues, but as you mentioned at the outset. It is our highest contribution margin business.
So the Incrementals are significant for us.
And then just last one I mean, you talked a little bit upfront about the change in administration and some of the benefits, but we also saw the fiscal year 'twenty. One budget finally passed at the end of the calendar year any benefit or funding maybe that gets freed up by that bill passing.
While the specific leak on on sort of that but as we have said before.
Both bipartisan.
On administration. They all are looking at more technology.
More technology, which will make it more efficient we are very well placed to have a great relationship with DHS Dod CBP a lot somebody footprint is that at the at the southern border and we continue to think that all the things that are happening and what we are hearing will be positive for us.
Thank you.
Thank you.
To ask a question.
And then one.
Sure.
Our next question comes from David Rodgers at Baird.
Line is open.
Hello.
You mentioned on the last call, we expect roughly half of the billion dollars backlog to be converted into sales through the remainder of this fiscal year.
Just given the difficulty you have in actually converting the backlog into sales how is that how has that changed for you guys CFO.
David Good question this is Alan.
As we look at the remainder of the year, we continue to expect a little bit less than half of our current backlog to be converted into revenue through the rest of the fiscal year, we have pretty good visibility and working with our customers in terms of the timing of of installations and the like so we have a pretty high degree of confidence that it'll be just a little.
<unk>.
Half of our current backlog.
Correct Okay.
And then can you just give us a brief update on how the safe and sound acquisition is going in because I know that youre focusing on the remote patient monitoring market and then you mentioned a few calls ago that would be roughly integrate next 12 months. So how is that progressing.
Good question of well.
And it's very much incremental buttered into our development of the next platform.
And we continue continued to move forward. It is very very much part of the total R&D that we're doing to develop the next generation, especially remote monitoring cloud computing and staff safe and sound as very much part of the Integra help development.
And in addition to that as part of our new development. When we look at our current commercialization effort. It's been instrumental in winning certain new business. So it's been very helpful for our sales.
Sales and commercial team to sell safe and sound along with our existing patient monitoring products as a nice differentiator for us. So it's really been a it's been a big win for us.
Great. Thanks, I appreciate it.
I'm showing no further questions at this time on the call back over to norm.
On line.
Ladies and gentlemen, thanks, once again for participating in our conference call.
We look forward to speaking with you at your next earnings call.
I wish everybody a healthy safe time, and again one of think once again, our total global employees of OSI systems for a job well done very proud of them. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference.
On the line.
Thank you Paul.
Okay.
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