Q3 2021 OSI Systems Inc Earnings Call
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Good day and thank you for standing by welcome to the OSI systems third quarter fiscal year 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your tell.
The phone please.
Please be advised that today's conference may be recorded if you require any further assistance. Please press star Zero I would now like turn the conference over to your Speaker day, Alan Edric, Chief Financial Officer. Please go ahead.
Oh. Thank you good morning, and thank you for joining us I'm, Alan Edric, Executive Vice President and CFO of OSI systems.
And I am here today, with Deepak Chopra, our president and CEO.
Welcome to the OSI systems fiscal 2021 third quarter conference call.
We are pleased to review with you our financial and operational results and provide our updated outlook for fiscal 'twenty one.
Before we discuss our Q3 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 corresponding GAAP measures of the company's results and a quantitative reconciliation of those figures.
Please refer to today's earnings release.
I will begin with a summary of our financial performance for the third quarter of fiscal 'twenty one.
And then turn the call over to Deepak for an overview of our business.
I'll, then finish with more detail regarding our financial performance.
And a discussion of our updated outlook for fiscal 'twenty one.
We are quite pleased with our third quarter performance.
Especially given the ongoing impact of the COVID-19 pandemic.
A major priority at OSI systems has been and remains the delivering on commitments to our customers and to our partners, while ensuring the continued safety of our employees.
Now we will cover some highlights.
First we achieved record non-GAAP fiscal Q3 earnings per share of $1 38 up 15% from Q3 of fiscal 'twenty.
Second.
We reported a record Q3 adjusted operating margin of 12, 6%, a 170 basis point increase from 10, 9% in the same period last year.
Each of our three divisions reported operating margin expansion over the prior year Q3.
Third bookings were again solid our book to Bill ratio was one one in fiscal Q3 and one two for the first nine months of fiscal 'twenty, one leading to a 23% increase in backlog since the start of the fiscal year.
And finally cash flow conversion was again strong.
Q3, operating cash flow was $42 million in operating cash flow in the first nine months of the fiscal year was a record $131 million.
Before diving more deeply into our financials, let me turn the call over to Deepak.
Thank you Alan.
And again, good morning, and welcome to the OSI systems earnings Conference call for the third quarter of fiscal 2021.
I am happy with our third quarter results, where we achieved as Adam mentioned record adjusted EPS and strong cash flow.
On slightly lower revenues from the prior year.
The significant revenue growth from the healthcare and Opto divisions was offset by security Division net continues to be impacted by the pandemic.
The bookings have been solid in each division and I'm proud that we have grown our backlog in each of the first three quarters.
<unk> ended Q3 with a backlog of $1 1 billion.
I will discuss a few of our third quarter highlights at each division and then turn it back over to Alan to provide further detail on our financial performance.
Starting with the security where.
Although revenues were impacted by the pandemic.
We did an admirable job of managing the challenging environment and expanded adjusted operating margins by controlling expenses and improving operating efficiencies.
Q3 book to Bill for Security was one one.
The booking levels combined with ongoing customer interactions.
Suggest that security is well positioned for a strong Q4 and to end the year in a strong fashion.
Going through some of the highlights of the security.
Division.
Passenger traffic was lower when compared to our pre pandemic time.
Air portion various regions internationally.
Are preparing for a return to more normal levels.
In Q3, we capitalized on several opportunities at major airports.
Provided our latest technology for inspection solutions for checkpoint and hold baggage.
During the quarter, we announced a strategic win a $15 million order from a key international Airport.
Provide <unk> hold baggage screening systems.
Along with a range of checkpoint security systems, including the Rapiscan 920 <unk>.
And already on baggage scanners itemize, our five extra trace detection units and met our walk through metal detectors.
Our broad range of solutions helps differentiate us in the marketplace, especially at large airports, where there are multiple requirements to upgrade or expand their screening infrastructure.
During the quarter, we also announced a $16 million order to maintain and support our installed base at U S aviation checkpoints.
Air cargo as we have mentioned before business continues to be very strong for rapiscan products.
At Port and border cargo screening.
We have experienced delays in revenue recognition with some customers as our cargo screening projects typically require on site testing and final customer sign off which has been impacted by the travel restrictions.
Many of the equipment for cargo has already been manufactured and even shipped to the customer site.
There are also certain delivery schedules that have been pushed to the right.
Our turnkey programs in Albania, and Bureau, nickel had been running as expected and our latest turnkey in Guatemala is ramping up and performing well.
On the booking front the cargo sales teams did a great job of booking several opportunities in our pipeline, both domestic and international to provide mobile and fixed cargo screening systems.
In Q3, we were one of the three vendors.
Awarded an indefinite delivery indefinite quantity contract.
IQ by the U S customs and border protection for multi energy portal excellent systems, including installation and training.
Upon receipt of delivery orders under this idea IQ, we expect provide our state of the Eagle <unk> drive thru cargo and vehicle inspection systems, the car view, which utilizes multi technology screening of passenger vehicles the search scan software.
Net integration platform, including some civil works installation and upgraded training and support this <unk> contract has a potential value of up to $480 million and contains a five year ordering period for systems and up to 10 years for.
<unk> maintain our support.
Please note that because the contract is an I'd IQ it is not reflected in our backlog until we get from delivery orders are received.
During the quarter, we announced a $5 million order from a U S based customer service cargo screening and BPI systems. In addition, shortly after the quarter end, we announced orders totaling $22 million for cargo related services, a $16 million contract from an international customer.
To provide maintenance and support services for several platforms of cargo vehicle and baggage inspection systems that are currently deployed at certain customer checkpoints and a $6 million order for operating and servicing cargo systems at a critical infrastructure facility.
We are seeing signs of the security business beginning to emerge from the pandemic related challenges.
Numerous recent awards and working on numerous other significant growth <unk>.
Global opportunities that we expect to capitalize on in the next few months.
Blind for business continues to be very strong both domestically and international.
Moving to the healthcare Division.
Revenues were about 18% higher than the prior year's Q3.
The division delivered significant operating margin expansion that in addition to a high contribution margin from revenue growth.
Was helped by operational improvements that should continue in the future.
We saw strength across multiple geographic channels announced a couple of key wins of note.
We received a $6 million order from a U S hospital to provide patient monitoring solutions and related accessories.
We also announced a $4 million order from a U S based medical center for patient monitoring and diagnostic cardiology products during.
During the quarter, we made significant investments in research and development as we focused on enhancing our core offerings and developing new products to help caregivers deliver patient care more effectively and efficiently overall, the healthcare division has made great strides.
In many areas through the first three quarters book.
Bookings continued to be strong in the healthcare division.
Moving to our Optoelectronics and manufacturing Division Q3, overall revenues were $19 million, including intercompany.
29% higher than the prior year.
Q3 revenues and operating income were the highest of any quarter in <unk> history, and Opco ended the quarter with a record backlog.
To deliver this type of performance are Mitch if pandemic is quite an achievement as the team has worked through global logistics challenges and longer electronic component delivery lead times.
<unk> saw growth across several product groups and we are increasingly seeing customers increase order quantities. We believe that these customers recognize the benefit of the global presence of our sales customer service and operational infrastructure, which can help limit their supply chain.
Disruptions in this pandemic challenging environment.
Specifically, we are seeing strong activity with defense and space communication customers industrial infrastructure related Oems and Oems that primarily serve the automotive industry, which has been a very good growth for us this quarter.
We announced a nice win an order of approximately $8 million to manufacture electronics sub assemblies for a leading provider of GPS tracking.
Solutions to the automotive industry.
Building on the momentum, we expect opto to finish the year very strong.
The strength continues to show even towards fiscal 'twenty two.
I am grateful for the efforts throughout our organization to serve our customers, while maintaining a focus to provide our employees with safe working conditions. Looking further ahead, we are.
We'll continue to focus on executing our strategy and our mission for a safer and healthier world with an expanding opportunity pipeline.
Expect to finish fiscal Q4 strong and we are building the foundation for a successful growing fiscal 'twenty two.
As always I would like to thank our employees customers and stockholders for continued support with that Im going to turn the call back over to Alan to talk in more detail about our financial results.
And updated guidance before we open the call for questions. Thank you.
Well, thank you Deepak.
Let's review the Q3 financial results in greater detail.
Our revenues in Q3 of fiscal 'twenty, one were $284 million compared to $293 million in the prior year Q3.
Similar to the first half of fiscal 'twenty, one we reported strong third quarter fiscal <unk> sales growth in the healthcare and opto divisions with a reduction in security Division revenues due to the continued effects of the pandemic.
Healthcare Division revenues in Q3 increased 18% year over year, as Deepak mentioned with strength across multiple geographic channels, particularly in North America.
After sales continued to be strong with Q3 third party sales up 30% year over year due primarily to revenue growth in our Asian operations.
We saw a reduction in Q3 revenue in the security division with sales down 19% year over year, largely due to the continued impact of the pandemic on our aviation and cargo businesses security bookings were again solid with a book to Bill of one one for Q3 and one four for the first nine months of fiscal 'twenty one.
In this fiscal year.
Which leads to further growth in backlog.
With the increased backlog and planned delivery schedules, we anticipate that the security division will resume year over year revenue growth in Q4.
The fiscal year 'twenty, one Q3 gross margin was 36, 7% versus 37, 3% in Q3 of the prior fiscal year.
The sales was the result of the mix of revenues among the three divisions.
The strong revenue growth in the optoelectronics and manufacturing division.
Which historically tends to carry a lower gross margin than the other two divisions.
Placed some pressure on the consolidated gross margin, though may positively impact the operating margin.
The gross margin was up in our healthcare division due largely to economies of scale associated with the 18% increase in revenues and.
And the gross margin in our security Division showed modest year over year growth, which was notable given the change in the revenue level driven by a favorable revenue mix and continued focus on operational execution.
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 as continue to make adjustments in fiscal 'twenty one.
These savings.
Together with the impact of reduced travel during the pandemic among other items contributed to a 12% decrease in Q3 SG&A expenses on a year over year basis.
SG&A as a percentage of sales was 24% in Q3 of fiscal 'twenty, one compared to 22, 4% in the same quarter last year.
We worked diligently across each of our divisions to improve efficiencies and prudently manage our cost structure.
R&D expenses in Q3 were $13 9 million.
Representing a $1 $4 million year over year decrease.
We continue to dedicate considerable resources in R&D, particularly in security and healthcare as we remain focused on innovative product development, which we view as important to the long term success of our businesses.
Moving to interest and taxes.
Net interest and other expense in Q3 of 'twenty, one decreased to $4 2 million from $4 7 million in the same prior year period as a result of reduced borrowings in light of our strong cash flow and lower borrowing costs compared to last fiscal year.
On the tax side, we reported a tax provision of 33, 7% in Q3 of fiscal 'twenty one.
Compared to a tax benefit of three 4% in Q3 of fiscal 'twenty.
Excluding the impact of discrete tax items.
Our non-GAAP effective tax rate in Q3 of fiscal 'twenty, one was 25, 7% compared to 23, 7% in Q3 of fiscal 'twenty.
We recognized discrete tax expenses of $2 2 million in Q3 of fiscal 'twenty, one compared to a $5 $1 million discrete tax benefit in the comparable prior year period.
So, let's now turn to a discussion of our non-GAAP adjusted operating margin.
Overall, our adjusted operating margin increased from 10, 9% in Q3 of fiscal 'twenty to 12, 6% in Q3 of fiscal 'twenty one.
We were pleased with the significant margin expansion in all three divisions, our space, especially in the face of overall topline headwinds.
In fact, the 12, 6% adjusted operating margin is a third quarter fiscal record for OSI.
Q3, non-GAAP adjusted operating margin in our security Division came in at 17, 9% up.
Up significantly from the prior year's third quarter, driven once again by a favorable revenue mix sound operational execution and cost control actions.
Our healthcare division reported year over year expansion of the non-GAAP adjusted operating margin.
Growing from 11, 8% in Q3 of last year to 13, 9% in Q3 of fiscal 'twenty One day.
Due in part to leveraging the fixed cost structure with improved sales and good operational execution.
The adjusted operating margin in our Opto Division also improved coming in at 12, 5% in Q3 of fiscal 'twenty, one as compared to 12, 8% in the comparable prior year quarter with the strength in revenues.
Moving to cash flow.
We continue to generate significant cash as Q3 operating cash flow of 42 million brought the total for the first nine months of fiscal 'twenty, one to a record $131 million.
This was achieved as we invested in increased inventory in preparation for anticipated sales growth.
While also experiencing elevated DSO due to the timing of collections.
Capex in the third fiscal quarter of 'twenty, one was $2 6 million and depreciation and amortization for the quarter was $10 3 million.
Our cash flow conversion continues to be quite solid we paid down our revolver to zero as of the end of the quarter.
Our balance sheet is strong with net leverage of approximately one point O as defined under our credit facility.
Finally, turning to guidance.
With the strong backlog, we are increasing our revenue guidance for fiscal 'twenty, one to the range of $1 123 billion to $1 8 billion from $1 1 billion to $1 $1 5 billion.
Given the bottom line strength of Q3.
And the outlook for Q4, we are increasing our non-GAAP earnings per diluted share guidance to the range of $5 15.
$5 40 per share from $5 to $5 35 per share.
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.
Currently believe this revenue and non-GAAP earnings guidance reflect reasonable estimates.
However, given uncertainties as to the duration and scope of the COVID-19 pandemic as well as other variables the extent to which COVID-19 may impact the Companys financial results is difficult to predict and could vary materially from the anticipated impact 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 potential strategic acquisitions, while also managing our cost structure.
We believe our efforts in these areas should enable OSI to continue our leadership in providing innovative products and solutions.
Finally, we would like to take this opportunity to thank the global OSI systems team for its dedication in supporting our customers and contributing to the creation of value for our stakeholders, while maintaining our commitment to safety.
And at this time, we would be happy to open the call to questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our first question comes from Jeff Martin with Roth Capital Partners. Your line is open.
Thanks, Good morning, Alan Deepak how are you.
Thank you good Jeff Thank you.
Alright, great.
Just curious if.
Strengthening sequentially.
Curious if there's a lifting of certain covenant restrictions. If you just have visibility to recognition of things that may have been pushed out from Q3, what specifically.
And do you see as <unk>.
Improving relative to the last two quarters in security.
Good question Jeff.
And obviously the first thing we have to sales the uncertainties uncertainties are already there.
Especially in our cargo business.
We have to make sure and it's required that the site is ready the equipment is signed off by the by the customers represent data is we can send people there to get them installed all that stuff has been challenging.
In some cases as I mentioned in my call.
That will be actually ship, the equipment and its and per customer site, but we could not get in time, either our people. There are the customers people to be able to day to sign off. So those are the kind of things that we think and getting a little better feeling that as this pandemic lansdowne.
It will open up more and the demand is still there we have not seen any any significant or kind of any cancellations or terminations of any guidance.
These are just delays most of the equipment is at a unique places that the customer launch and we feel that the pipeline of requirement globally, including U S and international continues to be very strong both domestically and internationally.
Jeff This is Alan just to add on to that.
The visibility for Q4, we believe to be very strong and our security business.
With a very strong backlog.
Scheduled to be delivered or converted into revenue in the quarter. So we feel we feel very strong about where we stand at disposition.
As we wind down the fiscal year.
Okay, Great and then on the healthcare segment is.
Experiencing double digit growth for four straight quarters.
How do you feel about healthcare heading into fiscal 'twenty two.
Some of it's obviously going to be a headwind to growth from COVID-19 related purchases of patient monitoring could you give us some relative perspective.
What kind of headwind you're facing.
From the the uplift of COVID-19. This past 12 months with respect to patient monitors.
Well number one is.
We are still building up.
The budget for 2022, Q4 still looks very good for us I remember this business a lot of book and ship. So you can look three or four quarters ahead, but we are feeling good about it the preliminary things look like yes, and with some COVID-19.
Leaning down there'll be some downwards not significant but other products like cardiology.
Cup.
It has been delayed due to <unk>.
COVID-19. So all in all we are quite feeling good about it also we are heavily investing in R&D on cloud computing.
At home care.
Connectivity stories, which lot of people are now talking about it at the same time.
The cardiology product line, we have new products being introduced we are building towards a.
The revamp of the new platform.
All of that stuff is there, which makes us feel good about it and safe and sound, which we did a very what I call. A critical acquisition of technology has been proven to be very good but differentiate us we've been able to differentiate us from our competitors with this new add on feature.
That's very helpful. Thanks for your time guys.
Thank you. Our next question comes from Josh Nichols with B Riley Your line is open.
Okay.
Yes, Thanks for taking my question and good to see strong orders right over the last 90 to 180 days at the Companys Press released out here.
I wanted to ask like not just seems like you have good visibility into <unk>, but looking at next fiscal year do you think that there's going to be a little bit of more of a return to normalcy in the company may be able to achieve this like mid to high single digit top line growth and kind of what youre seeing from what's already been built in for next year, given given the cadence from the order flow and how those are going to.
Be coming in over the next several quarters.
Josh This is Alan so thank you for your comments.
While we intend to provide guidance for fiscal 'twenty two on our next call as we do as we generally do in August.
I guess suffice it to say that we feel good about going into fiscal 'twenty two with the.
With a little bit more of a return to normalcy in the security business. The strong backlog that we have the pipeline of opportunities the tremendous momentum that our <unk> business has shown and the strength of healthcare overall.
We feel very good heading into fiscal 'twenty. Two so we're excited to wind down our fourth quarter and finished fiscal 'twenty, one strong, but I think we're even more excited to move into fiscal 'twenty two.
Thanks, Alan that's great to hear and then just looking here.
One pretty large hunting license right with the idea of queue here.
One of three.
The color that you can provide as far as potential timing of the orders is that more like a first half or second half potential for next year I realize like I said, it's not an order but.
Just looking at if you had any visibility on timing given the size of the opportunity there.
Good question. This is deepak here, yes, we are excited about it.
Yes.
Timing wise, it's difficult to predict and the amount is difficult to predict but we are told that when these kind of IDI cues get into place. The next step is a pretty fast moving.
Specific orders.
That's why that's how the government works. So we are quite excited about it our products are very well received.
Very good relationship with the customer and we expect that before the government fiscal year, which is September.
There should be lot more activity up actual orders on this particular specific thing and just to add onto it. This is not the only thing that's in the pipeline we have maintained at the other orders and other opportunities.
With the U S government Dod that.
We are quite actively pursuing.
Okay. Thanks.
Thanks for clarifying that and then last question from me then I'll, let someone else take a turn is that the company has now had two consecutive quarters, where youre doing north of 17% EBITDA margin higher than the company has historically done despite some of the revenue headwinds that you had mentioned day.
To assume that as you guys return to year over year growth that youre going to see it.
Be able to maintain and possibly expand the type of operating leverage or is there a little bit more investment that you're going to be looking to do on the sales and marketing R&D from over the next few quarters.
Yes, Josh good question. So our goal is always to expand margins, we look to expand our operating margins and our EBITDA margins and we balanced that at times with specific initiatives like <unk> mentioned in terms of.
R&D investments and sometimes on the commercial side as well, but the overall goal of the company is to show margin expansion top line growth coupled with margin expansion.
Thanks Jess.
Thank you. Our next question comes from Greg Konrad with Jefferies. Your line is open.
Good morning.
Good morning.
A couple of quick follow ups to those I mean first you started the year really strong and cash is there any way to think about conversion going forward and as the business comes back.
Working capital needs or anything that we should kind of be thinking about when we model cash out.
Sure Yeah. Good question, Greg it's been a strong cash flow year for us.
Of course, given what the implied growth rate is for Q4 and the belief of topline growth going forward of course there'll be some need for investment in working capital is.
Potentially for receivables and inventory, which is a good issue to have we also benefited a little bit this year by some higher customer advances, which helps our cash flow as well, but overall given the increased levels of profit and the continued relentless focus on working capital management.
We think we will.
We will continue to be.
As of signing deals and just you mentioned you had a strong pipeline.
In security as COVID-19 subsides, a little bit are you expecting maybe.
Steven step up as there has been some delays or is that margin on the revenue side.
Again, good question I think you answered yourself, yes, obviously with this pandemic.
Now the ability to closure is not that simple, yes, there has been some delays, but I look at that as a positive sign that as the pandemic winds down we already have a very strong backlog.
And the demand of our products are already there. So as it opens up the demand will continue to be strong and then if you are in the right place and you have the right products and you can deliver in a timely fashion.
Thank you have a great success story written on it. So we feel that it's been tough in Q3 as Alan mentioned security revenue was down but that was because of the delay in acceptance and stuff not to do anything to do with the orders. So backlog is so strong. So we believe that Q4 and going into fiscal <unk>.
<unk> security will continue to see growth.
And then maybe just one last one that's maybe a little bit longer term or kind of looking back I mean, I think back to <unk>.
Anthony in ETD over the past three or four years and kind of expanding the portfolio and you mentioned that $15 million International Airport and it seems pretty broad from an order perspective.
Over the past couple of years is there any way to think about the sell through of kind of the expanded portfolio, both organically and inorganically and maybe cut.
Customer take when you kind of go to.
Rfps or new business kind of how that's trended.
The portfolio, maybe has broadened both organically and inorganically.
Well.
Very broad question.
Definitely the broader portfolio.
Cash of capturing especially large customers, who have a very broad requirement.
<unk> has been a great success on the RTD has been great. The 920 <unk>.
The trace everything put together, especially with the integration solution at the same time and to be able to book software in collaboration with it gives us a lot of strength to differentiate from our competitors at the same time modules have led to it we are very very acquisitive minded. So if we can find the right products.
To broaden our portfolio to make it more acceptable to the customers' needs. We'll go do it we have a very strong balance sheet, we are not shy of doing it.
Thank you.
Thank you. Our next question comes from Christopher Glynn with Oppenheimer. Your line is open.
Thanks, good morning or afternoon.
I think.
Companies have talked about components and freight headwinds in particular.
Getting a little bit more treacherous in the June quarter.
I didn't hear too much about that is that something that is not causing you particular heartburn.
Well.
I wouldn't say that it's not causing but we are very much focused on it.
We have been working on it it doesn't seem materiality spot Q4, but we are looking at all aspects and at the same time. It. That's another reason if the inventory showed little sign of growth that.
That means that we have trying to get more product under our belt to make sure that and then there are shortages and things that we have the product. The other thing is in our space compared to our competitors. We are a very vertically integrated company. So we have a little bit more strength compared to our competitors to be able to cater to knee.
<unk> of our customers because we are vertically integrated the manufacturing in almost every every app.
Place that there is so we can manage it better whether it's Asia, whether HCP Europe, whether it's U S. Whereas Latin America, so that gives us much more strength to be able to manage this but definitely I would say I'm not going to say, we don't have concerns about it we do but we're managing it very well.
Okay, and thank you for that and on up to electronics.
Curious just big picture, what's going on there in terms of how much of the momentum and market penetration.
<unk> is positioned to drive as the macro cycle eventually levers off.
Levels off.
Versus really being a demand pull story here from the V inflection.
Again good question.
Now the good news again is in the <unk> business, we had a very broad customer base aerospace defense automotive healthcare and as you have seen about it that there's a huge demand and again. The first question that you asked about the component concerns and stuff. We are on the opposite side that are our custom.
OEM customers are focused very much on the strength that they want their product. So that we have the building capacity and capability.
Due to supply that and we think that this will continue into fiscal 'twenty two and.
And we mentioned it before that and as mentioned at one of the biggest growth for US has been and that is in the automotive industry.
That's been a very big growth opportunity for us.
Thanks, just one more if I may.
The security margin I'm curious, how that's positioned for fiscal 'twenty. Two if you get say low double digit topline via your bookings and your pipeline.
This year, you called out favorable mix and some temporary cost controls.
And how.
Mike Juxtapose, if youre getting solid topline next year and is there an obvious Mick.
Mix signal, there that we need to consider in modeling.
Yeah, Chris This is Alan good question also.
So again, our goal is always to improve operating margins our operating margins have been very very sound and the security businesses and this year on some revenue headwinds there'll certainly be some opportunities for economies of scale as we move forward with with with planned growth.
Simultaneously there'll be some of the kind of temporary reductions that we've seen in let's call it lower travel and some other type of lower expenses that happened during the pandemic that would come back that would come back so a little bit too early to call yet for fiscal 'twenty, two but we feel.
Very good about where our business will be in security.
Next year.
Great. Thank you Mark.
Thank you as a reminder, if you would like to ask a question press. The Star then the one key on your Touchtone telephone.
Our next question comes from Brian Clattenburg with Imperial Capital. Your line is open.
Great. Thank you guys very much it's been a while and I hope you're both doing well.
Thank you it's great to hear your voice my God Love It.
Uh-huh from following your guidance for 15 plus year to.
Go into the dark side and banking them back.
So.
Couple of quick questions first of all on the <unk> IQ.
$400 million cargo.
On the <unk> side with U S government.
Offered on that idea IQ is the traditional competitors like light open Smith.
And then maybe you can talk a little bit about your traditional win rates.
On something of that size.
Well I think you are very astute you already named the other people.
I don't have to add to it we will come back is great to hear your voice.
Regarding the win rate.
It's very difficult to you know you know us we're not going to say anything all I am going to say that is that we are very well positioned we have very good product and especially with.
With what I call a combination of.
Pi energy low energy transmit save backscatter all of those things put together make us very unique and.
And we are very well positioned to capture a big portion of this business.
Great.
That's going to be roughly $400 million over.
Five years that it is going to be let out and it's primarily in the border patrol.
Related is that what it is.
It's all volume at the border at the borders Okay.
Mostly at the southern border, but it may be somewhat northern border too.
Okay and then the next day.
Follow up question.
In terms of kind of a technology update and security there's been a lot of talk on the personnel screening side.
And historically, that's been a very small part of what you guys do.
But.
Given our recent spak from evolve.
And that.
Talking a lot about growth and the personnel screening side can you talk a little bit about what youre seeing in terms of competitive price pressures new technologies on our personnel screening.
The strength of one off or is there a huge uptick happening in personnel screening.
Maybe you can address that.
Well.
Again.
The market better than ACH.
Personal screening has always been part of our portfolio.
We've got great product net we've done a lot of advances in it.
We believe that as a great opportunity long term.
Obviously I won't comment on.
Evolve and their expectations and what day rate they have written but as a company it's part of our critical infrastructure.
Infrastructure program and we do have some very good products and have had very good success, both in what I call aviation area, but also in prisons and in our nuclear facilities and even in some high.
Pipe opportunity kind of places.
Sure.
People are concerned with of security. So I look at this as a great opportunity, but if you ask me is this opportunity bigger than all the other opportunities no. We look at cargo in ports and borders as the biggest opportunity and in that area. Besides equipment. As you know we are also into the software integration.
<unk> platform that has been very well received and we are very excited about that.
Alright, Thank you very much.
Thank you and there are no other questions in the queue I'd like to turn call back to management for any closing remarks.
Thank you everybody.
<unk>, one and thanks for all the support and confidence from us and thanking the team as Adena and I have said.
Very humble about the game's performance globally of OSI systems companies. During this pandemic challenging time.
To emphasize it will be a manufacturing company we have had.
A couple of cases, we've handled it very well.
And we are very proud to say that as a company. We continue to look after the Hilton security of our own people at the same time delivering on our commitments to our customers and that's the model and we will continue doing it and thank you very much for all your support looking forward to ending the year in a strong way and talk to you after.
To that to talk about the next fiscal year. Thank you very much.
Thank you. This concludes today's conference call.
You for participating you may now disconnect everyone have a great day.
Yes.
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