Q1 2023 OSI Systems Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the OSI Systems, Inc. First quarter 2023 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 the session you will need to press star.
One on your telephone please be advised that today's conference is being recorded.
Now I'd like to turn the conference over to your speaker today.
Alan Adrian Chief Finance Officer. Please go ahead.
Well, thank you Hello, and thank you for joining us.
Alan Edric Executive Vice President and CFO of OSI systems.
And I'm here today, with Deepak Chopra, OSI as president and CEO .
Welcome to the OSI systems fiscal 'twenty, three first quarter conference call.
We are pleased that you can join us as we review our financial and our operational results.
Earlier today, we issued a press release announcing our first quarter fiscal 'twenty three financial results.
Before we discuss these results however, 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 1095 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 will 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 refer to today's earnings release.
I will begin with a discussion of our Q1 financial performance.
And then turn the call over to Deepak for an overview of our business performance. We will then finish with more detail regarding our financial results and a discussion of our outlook for the year.
Our first quarter revenues and earnings were generally consistent with our expectations.
We anticipated a softer start to the fiscal year with momentum building beginning in Q2 as supported by the timing of planned deliveries from our significant backlog.
As we navigate the current economic environment, including supply chain delays and increased cost disruptive GOP geopolitical events inflation and rising interest rates along with the ongoing effects of COVID-19, we continue to prioritize delivering on commitments to our customers and business partners and <unk>.
<unk> the company for long term success.
Now we will go through a high level summary of our financial results.
First.
We reported Q1 revenues of $268 million.
A 4% year over year decrease.
These results included an approximately $4 million adverse.
Adverse FX impact.
Second we reported adjusted earnings per share of <unk> 87.
Down from $1 16 in Q1 of the prior year as a result of the reduced revenues just noted a less favorable mix of sales and additional interest expense under the credit facility, which was increased in December 'twenty, one with the primary objective of retiring the convertible notes.
Third Q1 bookings were solid with a book to bill ratio of approximately one two.
Leading to a record quarter end backlog of nearly $1 3 billion.
And finally operating cash flow for the first quarter was $17 million, representing a $28 million improvement over Q1 of the prior year.
Capital expenditures of approximately $3 million were consistent with the same prior year quarter.
We were again active in our stock repurchase program spending approximately $17 million in the quarter and then further last month, our board increased to 2 million shares the number of shares authorized in our stock buyback programs.
Before diving more deeply into our financial results and discussing the fiscal 'twenty three outlook I will turn the call over to <unk>.
Thank you Alan and good morning to all of you.
Our fiscal 2023 plus quarters performance.
Was generally to our expectations.
As Alan mentioned, we expected the revenue growth in fiscal 2023 to be more skewed towards the second third and fourth quarter.
We had very good bookings quarter, achieving a book to bill ratio of one two.
Despite our start to the fiscal year.
With a significant backlog and near term visibility on certain attractive opportunities.
We expect that 2023 fiscal year to be in line with our initial revenue and adjusted earnings guidance.
Playing strong growth for the next nine months.
Our operating cash flow in Q1 exceeded operating cash flow in the same quarter last year.
And we anticipate even greater operating cash flow over the balance of the year.
I will now talk about each division's performance in the quarter, starting with the security Division were.
Q1 revenues were 3% lower.
Year over year.
Bookings were approximately $204 million for a book to bill ratio of one four for the quarter.
The lower operating margin in the security Division for the quarter was mainly due to the product mix.
And lower revenue of the division.
We expect security division operating margins to improve significantly as we progress through the rest of the year.
But overall demand for.
<unk> four checkpoint security products and related services continued to improve as airport and related activities has ramped up we.
We saw higher demand for our supplies and accessories also which include consumable items that are recurring revenue source.
<unk> scans inspection systems will be used we are very proud of it at the FIFA World Cup 2022 to be held in Qatar.
We are finalizing our preparation for the event, which starts in late November .
Our already on 920, CX baggage and parcel inspection systems larger tunnel line 22, CX said models and met our <unk> walk through metal detectors will be among the equipment utilized to screen thousands of people in bags daily during this prestigious soccer event.
We continued during the quarter.
To stay active in pursuing and securing port.
And border security customer opportunities both in U S and international.
We had multiple wins and announced a couple of them.
We received an order for $22 million to provide comprehensive service maintenance and spare parts support for various rapiscan cargo and vehicle inspection CVI systems deployed internationally.
The most significant activity at the border for us relates to the large orders we received from the U S customs and border protection that are expected to be delivered primarily over the next two to three years.
Our cargo and vehicle inspection products are used extensively at borders to prevent contraband and elicit materials and drugs such as the NFL and metals that mean.
Crossing into the U S.
We continued to deliver albeit inspection products to CBP in Q1 with modest amount of revenue significant revenues from the CBP program over the balance of this fiscal year and in fiscal 2024.
However, the timing can shift a bit of customer needs and assessments.
We also continue to invest in technology and solutions.
<unk> enhanced our security offering.
Can drive recurring revenues during the quarter.
We completed the acquisition of a small strategic acquisition called Quadric.
A UK based provider of training course software for checkpoint security operators, we expect to further develop this technology and integrate it with our existing search scan software platform and training modules to broaden our standalone subscription offering for security.
Customers.
<unk> scan is a common integration platform designed specifically to work in multi system multi site security inspection programs and help customs and security operators perform at the highest levels.
<unk> is deployed at major ports and checkpoints worldwide and is getting lot more publicity and acceptance.
Our turnkey service operations in Puerto Rico, Albania, and Guatemala continues to do well as our customers rely on these programs for security and to enforce regulatory trade and tariff requirements.
The revenues from these services vary from quarter to quarter in relation to the specific volume of port activity.
During the quarter.
We added a new multi year turnkey services customer.
During the first fiscal quarter.
Although small in size.
This is very significant as it's a first in the airports aviation sector.
Our services are expected to include daily screening of the airport staff and crew and screening records and our complaints at the airports perimeter access control points.
Securities backlog is strong and increasing activity across many of our end markets provides a lot of confidence for the remainder of 2023.
Moving to the opto electronic and manufacturing division.
<unk> delivered strong results in the first fiscal quarter with $94 million in revenue, including intercompany revenue, which is an all time quarterly.
Quarterly record with strong growth in the division's operating profit.
<unk> momentum is expected to continue as our backlog at the end of Q1 'twenty three.
It was 22% higher than.
And then the backlog at the end of Q1 2022.
Auto has been gaining new customers and becoming a preferred supplier for many OEM customers.
As an example.
With high customer satisfaction during the quarter, our flex operation was awarded Zollars.
Hot Hero award for being a valued critical supplier to Azores Hot defibrillation product lines.
Which is a great honor.
In addition to the healthcare.
<unk> OEM customer base is diversified in multiple markets, including defense space consumer high Tech industrial and automotive.
Given the anticipated higher demand in <unk>.
We have expanded our operations.
For manufacturing in Canada, India and Indonesia.
Turning now to the healthcare Division, where Q1 was challenging quarter with sales down 14% year over year.
Q1 was a tough comp as last year's quarter still had heightened sales given the spike in cases, where the cover delta variant around that time.
During the quarter we.
<unk>.
Several orders from U S. Various U S hospitals, and we announced one of the larger ones a $4 million order too.
To provide patient monitoring solutions and related accessories through a U S based hospital and which we expect to provide exhibit central station area Delta elementary expression patient monitors Gil patient monitors and Samsung patient management software.
We have been increasingly successful in adding software modules, such as safe and sound to the bundled patient monitoring products, which lifts there.
Recurring revenue portion of our overall sales and differentiates our products from our competitors.
Continue to invest in R&D and healthcare to bolster our core offerings. Our customers are increasingly looking for solutions with enhanced connectivity and remote monitoring capabilities, which are the focus of our R&D efforts.
With significant backlog in security and opto.
We feel good about about our prospects in these divisions for the balance of 2023, and we also expect stronger performance from health care as we look forward to the rest of the fiscal 2023.
With that I will turn the call back over to Alan Eric to talk in more detail about our financial performance before opening the call for questions. Thank you.
Thank you Deepak now, let's review the financial results for our first quarter in greater detail.
Our first quarter revenues were down 4% compared with that of the prior year Q1, or approximately 2% on a constant currency basis, given the strength of the dollar.
Fiscal first quarter Security Division revenues were down 3% largely due to the unfavorable FX impact.
The Security Division book to Bill as Deepak mentioned was approximately one four.
Positioning the division well going forward and we anticipate significant sales growth commencing this quarter.
<unk> sales increased 2% year over year on the growth of intercompany sales to support the anticipated upcoming security sales.
Well up to a third party sales were consistent with third party sales in the prior year quarter.
After a bookings were again solid leading to a record up to a backlog, but supply chain constraints have led to delays in production and shipments of certain orders.
The health care Division reported a 14% reduction in year over year revenues in part due to a tougher year over year comp given the prior year demand during the Covid Delta variance Serge.
The Q1 gross margin was 32, 6% about two 9% below that of the prior year. This.
This change was primarily driven by the lower sales in the healthcare division, which carries the highest gross margin of our three divisions.
Higher up to a sales as a percentage of total sales as this division tends to carry the lowest gross margin of the three divisions.
And a less favorable mix in the security division sales with increases in certain component and freight cost adversely impacting each division's gross margin.
Our gross margin in general will fluctuate from period to period based on revenue mix and volume inflation impacts of supply chain among other factors.
Moving to operating expenses.
We continue to work diligently across each of our divisions to improve efficiencies and prudently manage our SG&A cost structure.
Our Q1 results again demonstrated the success of these efforts.
Q1, SG&A expenses were $53 4 million or 19, 9% of sales compared to $57 3 million or 25% of sales in the prior year Q1.
While foreign exchange was a headwind to the topline revenues.
It did have a beneficial impact on our operating expenses.
Research and development expenses in Q1 of fiscal 'twenty three were $14 5 million.
Relatively consistent with that of the prior year.
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 vital to the long term success of our businesses.
In Q1 of fiscal 'twenty, three we recorded $1 2 million of restructuring and other charges compared to $2 5 million of such charges in Q1 of the prior fiscal year.
Moving to interest and taxes.
Net interest and other expense in Q1 of 'twenty three increased to $3 4 million from $2 million in the same prior year period, primarily due to rising interest rates and the maturity of our 125% convertible notes on September one.
We're at a lower rate than our current borrowings.
We executed an interest rate swap during Q1 to fix a portion of our floating rate debt.
On the tax side, our reported effective tax rate under GAAP was 24, 4% in Q1 of fiscal 'twenty three compared to 15, 9% in Q1 of fiscal 'twenty two.
In Q1 of fiscal 'twenty, three we recognized a discrete tax benefit of <unk> 1 million as compared to a discrete tax benefit of $2 1 million in Q1 last year.
Excluding the impact of discrete tax items, our normalized effective tax rate in Q1 of 'twenty three was 25, 1% compared to an effective normalized rate of 25, 4% in Q1 and fiscal 'twenty two.
I will now turn to a discussion of our non-GAAP adjusted operating margin.
Overall, our adjusted operating margin in Q1 and fiscal 'twenty three decreased to eight 7% from 10, 9% in the same prior year period.
This was primarily driven by the reduction in revenues and gross margin previously described.
We were pleased with the increase in the adjusted operating margin in our Opto Division.
Which expanded 12, 7% in the first quarter of fiscal 'twenty three.
11, 4% in the prior prior fiscal year first quarter due to a more favorable product mix and implementation of certain efficiency improvement initiatives.
The adjusted operating margin in the security Division decreased to 12, 8% in Q1 from 16, 2% in the prior year first quarter.
On lower revenue with reduced gross margin on a less favorable product mix.
We expect nice sequential improvement in this division in Q2 on stronger revenues and a more favorable revenue mix.
With lower revenues and a less favorable revenue mix. The adjusted operating margin of our health care Division decreased to four 9% from 12, 1% in the prior year quarter.
We are forecasting this division to show significant improvement over Q1 as early as this quarter.
Moving to cash flow.
Cash flow provided by operations was 17 was $17 million in Q1 of fiscal 'twenty three <unk>.
Compared to cash used in operations of $11 million in the same prior year quarter.
The increase was driven by working capital improvements.
Capex in that in the fiscal first quarter was $3 2 million.
Depreciation and amortization in Q1 was $9 5 million.
We continue to be active in our stock buyback program in Q1 of fiscal 'twenty three during which we spent $17 3 million to repurchase about 208000 shares.
Our board increased the buyback authorization in September and as of quarter end, approximately one 9 million shares were available to repurchase under the program.
Our balance sheet is solid with.
With net leverage of one six.
Significant capacity for acquisitions and additional stock buybacks.
We retire the convertible notes in September utilizing a combination of our revolver and term loan, which we had put in place in December 2021, primarily for this purpose, leaving plenty of liquidity.
Aside from about $7 million of annual required principal payments under the term loan the bulk of our debt matures in fiscal 'twenty seven.
And finally turning to guidance.
We are reiterating our previous revenues and non-GAAP adjusted earnings per share guidance.
This implies revenue growth in the range of 7% to 11% and adjusted EPS growth of 17% to 22% over the remaining nine months of fiscal 'twenty three.
The non-GAAP diluted EPS range excludes potential impairment restructuring and other charges amortization of acquired intangible assets and noncash interest expense.
And their associated tax effects as well as discrete tax and other nonrecurring items.
We currently believe this revenue and non-GAAP earnings guidance reflect reasonable estimates.
The actual impact on the Companys financial results of the Covid pandemic disruptions and increased costs in the supply chain and rising inflation and interest rates is difficult to predict and could vary significantly 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.
We continue to remain focused on the growth of our businesses and continued proactive management of our cost structure.
We believe our efforts in these areas will enable OSI to continue providing innovative products and solutions.
We look forward to continuing to navigate through the current dynamic and challenging environment.
While gaining traction in key strategic growth areas and positioning the company to capitalize on improving end markets such as aviation.
We would like to take this opportunity to thank the global OSI systems team for its continued dedication in supporting our customers and our partners and at this time, we would like 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 please standby, while we compile the Q&A roster and one moment Bob first question.
And our first question comes from Brian <unk> from Imperial Capital. Your line is now open.
Great. Thank you very much great quarter.
And let me just jump right into questions.
Thanks, Brian .
So can you give us an update on the status of the TSA certification, where you are on the CET based inspection equipment.
Yes, Bryan Hi, this is deepak here.
As we have mentioned before on the checked baggage side. The presence certification that we have is five eight.
Which applies to carnival and we've been very successful in that side.
Data has no specific.
Qualification for the ongoing.
Yes.
The replacement cycle, which according to USDA is still couple of years away and there are still finalizing with the European Union what the final.
Procedure is going to be.
So at this stage, we have five eight Sam as others people and we are.
Alright successful and whatever it is happening, especially in the cargo space.
Okay is there any update on the.
The upgrade cycle, that's supposed to be happening I guess.
For the last five years, we've been talking about that in terms of the U S TSA with checked baggage.
Well the only thing we know is that is pushed out.
<unk> 2425, but we had it it's not in our hands, it's in DSA <unk> and <unk>.
That basically have to make their decision.
And covered is pushed everything to the right.
But in the European side, there's much more activity and we are very well qualified to win those orders.
Great.
Moving on to the Opto side real quick it continues to perform extremely well.
What is driving that is there anything specific a specific sector.
Specific product that is driving all this growth.
Well, maybe Alan can add onto it but in my view looking at it all the sectors have done very well automotive sector has been very very successful medical has been very good and it continues to show very strong.
Of growth.
That's one of the things that Alex Alan mentioned also the Flex circuit, which is a division and the OSI electronics has done very well and we won some great kudos from our customers, but in aerospace and defense and high Tech consumer electronics industrial named the sector. Good news is that's one of the things we're very proud about.
It's a very diversified product portfolio.
And we personally think one of the things that I've said it in the before one of the things that has also helped us very much there's a lot of desire by the OEM customers.
To move away from China, and with our presence in Indonesia, our brands in Malaysia Auto brands in India. It's been a good good blessing for us and that's one of the reasons I said in my speech that we have expanded our facilities. There that has been a big positive Alan.
Yes, I think what Deepak was describing is exactly right our diversified model, our diversified customer base and medical defense Aerospace technology industrial automotive amongst others has really played as well and.
I would really say hats off to a lot of our sales and business development teams are going out there and getting new business from existing customers as well as bringing in brand new customers. So we've really seen a tremendous strength in the division and.
We're certainly hopeful we're going to see that continue for the foreseeable future.
Great and then just my final question is on the health care Division.
It was weak kind of year over year.
From first quarter last year.
When do you expect to see that recovery.
Were there specific reason.
It was weak year over year in this first quarter was there a specific shipment or a product line that that didn't go out.
Well again, Brian one thing is that first quarter is relatively weak to begin with historically and secondly that we expected that last year Goldman was still there.
Demand of our patient monitoring at quick turnaround.
That demand has slowed down.
So that down obviously, we are not that happy.
But we look at that.
Second third and fourth quarter will be stronger.
And there is lot more activity and one of the things as we are investing quite heavily in San Fran <unk>, our software platform, which has been very well received and Ken and basically makes us a little bit different than our competitors and we continue to look at that as a growth opportunity and it also as high margin Alan you want to pay.
Yes, I think that Deepak summarized it well, but Brian we do expect to bounce back with a with a stronger sequential quarter for sure here in Q2 and pick up some further strength in the second half of the year. So we do believe the performance in the health care Division.
I'll look much better.
The rest of the year compared to Q1.
Great. Thank you very much.
And thank you and one moment our next question.
And our next question comes from Larry Solow from CJS Securities. Your line is now open.
Great Good morning, guys.
Just a couple of follow ups Deepak you mentioned I don't know you've talked with us for a couple of years just the large a couple of years I think that the $200 million.
Customs and border protection has that actually.
Have you started to deliver on that at all and then I guess part two I know I think last quarter you talked about.
In terms of deliveries is there any update on that and it's been about a year. Since you I guess I think there is still.
Pretty large piece of the idea of <unk> remaining.
What's your visibility on additional orders.
Larry This is Alan I'll take the first part of the question Deepak can follow on so yes, we began delivering some of that CBP orders from the IQ in Q4 of last year, which continued into Q1 of this year.
Pretty modest revenues I think as Deepak mentioned in opening remarks, this quarter that being said, we expect to see a significant acceleration of the revenues beginning now so we'll see much bigger revenues in Q2, and Q3 and Q4 continuing on into 'twenty, four and and maybe part of 25%.
So that's kind of what our current outlook is and then we would anticipate.
Right there could be follow on orders Deepak if you want to add.
Larry This is deepak here Alan put it well.
The ramp up will start faster now in Q2, Q3 Q4 of this year compared to what wasn't.
And most of that has nothing to do with us.
It's the delay in the civil works not ready in some other places.
The delay from that side, so that it will continue and like Allen mentioned and continue into 2024 and beyond and we still are very confident that with that we are very well position that from the IQ there might be there could be some additional bookings also.
As more products are delivered so that we look at this as a long term play we've always said that and yes. Some of the things that are not in our hands.
But CVP is a very focused customer and they need certain things to be done at the border and we are very well placed with it including our search scan software, which is very important.
And as the CPP I guess would that be would that be the only agency involved I guess.
As for the U S border southern and northern border could that be quicker or are there other agencies and then other I assume there are significant international opportunities around because.
In terms of vehicle inspection across the globe and I think as minimal today right.
There are I don't know if its aggressive estimates, but people wanted to eventually target.
Searching a lot of large majority or at least the commercial vehicles of amount of tickets.
Well you put it very well.
<unk> is our main customer in that.
Yes, there is international traction and Thats why we are very excited about the search scan software implementation also but in addition, one of the other comments we want to make is there are other agencies, which is not to do with border security that other agency like State Department. The Department of Defense and stuff also a very big customers for us and we continue.
To get a lot of success with the other divisions of the U S government and international governments.
Got it okay great.
Quick follow up just on Brian's question on the on the up so segment in diesel.
Backlog was up 22% year over year.
Second number.
Does that assume some prices in there or is that mostly volume.
Was there any tuck in acquisitions or not or what kind of drove that large numbers at some larger longer lead time orders in there that are skewing that or is it just.
Pretty much pure growth.
Larry This is Alan good question and it is all organic.
As we haven't done any acquisitions during that period of time in the Opto Division.
What we're seeing from some of the customers with some of the challenges in supply chain and longer lead times and at times, they are giving us.
A longer order if somebody used to give us.
Three month order they might give us a six month order if somebody gave us six month order in the past, perhaps they might give us a nine or the order. So we're getting some some larger orders as a result of that to give greater visibility going forward a little bit of price.
With passing on certain purchase price variances and stuff with the with inflation and certainly growth in unit volume as well so really a combination of all of those factors.
Just to add to that.
That is a depot care the other thing I want to emphasis emphasize.
There is a lot of focus on it to move away from China.
And if you have done well with your customer and you have the ability to support it and you have the supply chain under control.
And facilities like we have an extended we've expanded them in but Tom Indonesia, Malaysia, India.
<unk> played a big part of capturing more business from our regular customers, who basically are most focused on.
Seeing growth and working with a smaller bunch of vendors and we have had.
We are well positioned in various places and have been a very very good supplier to our customers.
Got it great I appreciate that color.
Awesome just last question just on the cash flow Alan I know Q1, obviously it was a little bit certainly.
And so it's a backend loaded year, but the operating cash flow did exceed net income in the quarter.
Even on an adjusted basis do you expect that to continue on a full year basis. I don't think you guys specifically to free cash flow, but do you expect the operating cash flow and free cash flow.
Obviously improve over last year, but do you expect it to sort of.
Close to net income as it has in the past.
Yes, Larry well, while we do not provide cash flow guidance per se.
We think there is opportunity for strong free cash flow in fiscal 'twenty three.
Good afternoon, and we do expect inventory to remain at an elevated level. This year, but in terms of the conversion I do think we can have very strong conversion certainly north of where we were last year and approaching where we used to be in the past and all three of our businesses are are finely tuned to the key levers that drive the strong.
Operating cash flow and free cash flow. So you have some great opportunity there.
Got it great. Thanks, Thanks again.
And thank you.
And one moment our next question.
And our next question comes from Christopher Glynn from Oppenheimer. Your line is now open.
Thanks.
And good afternoon, depending on where you are I guess.
So question on October electronics.
Curious if you could size the past due backlog and also related to that.
If and as you are able to.
Lock it in.
Is there a real run rate step up related to that.
In and around.
What you mentioned about migration from China. It just seems like this.
<unk> kind of restrained and as good as the numbers.
Then the backdrop that you describe is.
Almost sounds like another round still.
Yes, Chris are a really good question. This is Alan I wouldn't necessarily categorize it as past due backlog because we're working quite well with all the customers there, but that being said, there's probably some opportunity.
Probably something less than $10 million of extra revenues, we could have had had they not been certain component shortages.
You might have a.
98% of the parts, but if youre missing those final 2% you can't ship a complete part so it's not a it's not a big.
Backup there that will then unleash significantly higher revenues, but we just expect continued continued strength in the business.
Each quarter over the balance of the fiscal year.
Well this is deepak I think adena supported well.
I'll also emphasize to it that we are very much focused on what we call it.
Value added so if we're working with our customer to supply.
$5 a box.
Caucus now with a broad technology.
Our global presence, we're trying to work out can we add more value to that which is a very very good strategy for the auto group.
That gets us higher on the food chain on the customer list and as the customer looks at it we basically continue to work with them to get more value added that we can supply, which we think long term will continue to grow.
Great and then one on.
Security.
You have <unk> had backlog, there and a big chunk from the CBP and in some cases backlog businesses.
Little bit more challenged with price cost it certainly sounds like you've flushed out the worst of price cost mismatch in backlog in the current quarter.
But I just wanted to revisit.
First affirm that point or clarify and then.
With the Big idea Q1, how do you preserve the economics.
Those wins from when you bid them and is that even possible.
Good question.
Youre, absolutely right on longer term contracts.
Prices fixed.
So you can't change it.
But we haven't seen though there has been some push outs and stopped because of component shortages.
Site not ready.
I would say on a bigger scale.
And now we have not seen too much erosion of our margin.
On the on the what I call on paper looking at the products and the same way think about it that all indications are that there is some easing in the supply chain, both in freight and in component costs and stuff so as the cost of.
That product out with the longer timeframe, we have we expect that things will stabilize.
Great. Thank you.
And thank you.
And one moment our next question.
And our next question comes from Jeff Martin from Roth Capital. Your line is now open.
Thanks, Good morning, Alan and Deepak Hope Youre doing well.
Dave I just wanted to see if you could give us a little more detail around the traction that search scan maybe getting is it still too early to be talking too much about that.
Also curious about.
How long the sales cycle is there and when we might expect to see.
A little more accelerated ramp.
Alright.
Again, sorry, secondarily, how that ties into the quadrant acquisition that you mentioned this morning.
Thank you good question Jeff.
But the way it's been slow progress with CVP.
In this quarter, we expect the second third fourth quarter could be stronger same thing as it goes in 2024 as more and more installed base happens. It also brings with it the search scan software and the other good news for US is that we we've been we have got the certification on what is called <unk>.
Which is a big plus for the software to be installed at various locations that the customer wants.
We continue to see progress towards a slow progress.
At the same time.
<unk> brings to US a combination of training and search scan. So we can mix the things together and give more applications and more capability of supporting additional functions that the customer wants us to do.
So all of that stuff continues to focus that ultimately this software not only just in the U S and other parts of the World will continue to become like a licensing software with our recurring revenue.
Just happening it's not like it's the model.
Patient purposes that we have to work with the customer and their needs, but all indications are that in many places, especially with CBP.
Getting a lot of traction.
Okay, Great and then you had mentioned the first new multiyear turnkey customer in airport aviation.
I'm curious to know a little bit of background how that opportunity.
All then eventually came to light and then what you are thinking in terms of is that a major strategic initiative.
For Rapiscan going forward.
Well I'll answer it backwards, one we think just look at our history.
From where we were five years 10 years ago.
We basically have <unk>.
On a new line of ports and borders have been very well received with or without turnkey solution have been very successful.
So we've been working very diligently to see what other places we can look at it.
Aviation happens to be another area, which as you have read I'm sure everybody's talking about it you can't do inspections fast enough. If you have to keep increasing the people labor name, but it is not there. So this kind of auto measure.
It is a natural place.
We have demonstrated to the customers have been working with them what can be done in the ports and border security and other areas. So we found a successful.
When.
In a new area internationally, though very small right now.
What I would call is a beginning of a new marketplace opening up for the aviation side and out.
We are working diligently it's not a needle changer right now, but it's strategically very well and as that expands and gets more successful and we can take most show and tell to other customers. We think it's a new market.
Great and then last question with the Hurricane gone through Puerto Rico, and causing significant disruption I was just curious if you saw any disruption with your turnkey operations there.
Jeff This is Alan no.
No significant disruption obviously for a few days, while it was occurring but our general volumes in Puerto Rico tend to be about the same some some delays and some paperwork and and the like down there, but overall no significant change in Puerto Rico, and just to add onto it Fortunately no.
Damage to our equipment.
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Our employees are all safe.
And during all this time.
We worked diligently and we continue guide as Alan mentioned, we are continuing to work.
Excellent. Thanks for your time guys. Thank.
Thank you.
Thank you.
And again, if you'd like to ask a question that is star one one again, if you'd like to ask a question that is star 111 moment. Our next question.
And our next question comes from Josh Nichols from B Riley. Your line is now open.
Yes, thanks for taking.
Taking my question.
I just wanted to ask a little bit about the small acquisition that you did I know that that could be integrated with search and could you elaborate a little bit on that and progress that the company has made.
Growing and it's more of a SaaS revenue base and the opportunity on that front as we look out a little bit further.
Well good questions, it's a very small acquisition.
They do training best in UK.
Do training for people.
Indeed inspection space at checkpoints.
We had been using them as a as a vendor for some time and Todd It was strategically good that now we know about it to combine it so that we can broaden our search scan platform for opening more applications to a broader customer base and yes, it's all heading towards SaaS.
Model between search scan and Quad Rica and.
And we feel that.
But again I want to emphasize that again before the other person asked the question.
We definitely believe long term this will continue to grow.
The slow part it's a new area. We're entering into we are working with our customers and economy, a SaaS model, we look at it as a licensing plus good margin and and we also very much focused onto it that it's agnostic to which equipment, it's hooked onto whether it's a apples scan equipment on a car.
Patterns of equipment that is X ray machines, whether it's television cameras or whatever so we continue to broaden our application need for this software models.
Thanks, and then just curious.
So the new turnkey it.
You announced.
Small implies the first airport aviation sector is this like a land and expand opportunity could this become more meaningful I'm just curious about the growth opportunities here or if there's more opportunities in the aviation sector, where previously you haven't really done so much on the turnkey side.
Yes, yes, and yes.
We basically have a multiyear contract.
It's starting very small to see whether the viability of it as it expands even at the present customer it can significantly expand as more and more applications on into it and then as this becomes a model same model that we have said before from Bureau record in Mexico The Albania.
To that end the borders and ports, we feel that it's a good model to expand into the aviation sector and we'll continue to see some success as we demonstrate the efficiency of that of this turnkey model.
And then last question for me just with shares trading.
Depressed level of 7% to eight times EBITDA.
Despite you have a record backlog and I think the outlook for this year is the growth's going to accelerate materially relative to.
So last year.
Whats your thoughts on the buyback, you've obviously been buying back pretty aggressively but the cash over $50 million are you comfortable allocating a very large percentage of your free cash to share buybacks. If the stock does remain at these levels or what's your thoughts on the capital allocation strategy there.
Well, we don't talk about what these things are and specifically in the future, but you said it very well.
We are very much aggressive in it that we feel we are undervalued and we continue to look at when we are able to buy.
And the board has been very very supportive of it with the increasing of the stock purchase plan.
And we've been very active and do it and we will continue to be active.
Great. Thank you.
And thank you.
And I am showing no further questions at this time.
Well I want to thank everybody I know its in the morning time in the market is still open. Thank you very much for taking the time to attend it.
Want to thank all our staff and attendance.
And again want to emphasize and thank our employees and their families.
And our customers.
To be full support in working together and we thank you and look forward to your next to our next conference call. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
The conference will begin shortly.
As Johan during Q&A, you can dial one one.
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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