Q1 2024 OSI Systems Inc Earnings Call

October 26, 2023

Right.

Yeah.

Thank you for standing by and welcome to the OSI Systems' first quarter 2024 conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

You'd like to remove yourself from the queue simply press Star one one again as a reminder, today's program is being recorded and now I'd like to introduce your host for todays program Alan Edric, Chief Financial Officer. Please go ahead Sir.

Hi, good morning, and thank you for joining us I'm, Alan <unk> Executive Vice President and CFO of OSI systems, and I'm here today with Deepak Chopra, our size President and CEO.

Welcome to the OSI systems fiscal 2024 first quarter conference call. We are pleased that you can join US as we review our financial and operational results.

Earlier today, we issued a press release announcing our 2020 for fiscal year first quarter financial results and.

Before we discuss our 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 in 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 both to GAAP and non-GAAP financial measures when describing the company's results.

For further information regarding non-GAAP measures and comparable 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 high level summary of our financial performance for the first quarter of fiscal 'twenty four and then turn the call over to Deepak for a discussion of our business and operational performance.

We will then finish with more detail regarding our financial results and a discussion of our outlook for fiscal year 'twenty four.

Our first quarter financial results were generally solid with the security Division again generating double digit revenue growth and significant year over year operating margin expansion.

In the Opto division performing very well.

While the healthcare division experienced a challenging quarter.

We are enthusiastic about the overall significant revenue and earnings growth anticipated for the balance of fiscal 'twenty four.

Let's start with a high level summary of our Q1 results.

First we reported Q1 revenues of $279 million.

Representing a year over year increase of 4% driven by revenue growth of 14% in our security Division and.

And 2% in the Opto Division, which were partially offset by a 13% decrease in revenue in the health care Division.

Second.

We reported Q1 non-GAAP adjusted earnings per share of <unk> 91.

Up 5% from Q1 of the prior fiscal year as strong operating results overcame the impact of approximately <unk> 11 per share of additional interest expense associated with higher interest rates on our borrowings.

Third.

We ended the quarter with a backlog of nearly $1 8 billion. The strong backlog provides outstanding visibility for the full fiscal year.

Before diving more deeply into our financial results.

And discussing the fiscal 2024 outlook I will turn the call over to Deepak.

Thank you very much Allen.

Good morning to everyone.

I am pleased to report that our fiscal 2024, our first quarter performance aligned with our expectations.

Operator: Thanks.

We achieved 4% revenue growth and increased margins.

With a strong backlog coupled with our significant recent awards and high visibility into the opportunity pipeline.

Expect significant revenue and adjusting adjusted earnings per share growth.

Fiscal 'twenty and beyond.

So let's dive into the performance and highlights of each division during the quarter and begin with our security Division, which saw an increase of 14% in Q1 revenues and operating margin expansion.

Operator: Thank you. Thank you for standing by.

The division had bookings of $174 million during the quarter, resulting in a book to bill ratio of one one.

Operator: Welcome to the OSI Systems first quarter to 2024 conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded.

Operator: And now, I'd like to introduce your host for today's program, Alan Edrick, Chief Financial Officer. Please go ahead there. Good morning. And thank you for joining us.

During the quarter.

We made considerable progress on the ramp ups.

Alan Edrick: I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. And I'm here today with Deepak Chopra, OSI's president and CEO. Welcome to the OSI Systems fiscal 2024 first quarter conference call. We are pleased that you can join us as we review our financial and operational results. Earlier today, we issued a press release announcing our 2024 fiscal year first quarter financial results. And before we discuss our results, however, I'd 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 Security's litigation reform act of 1995 with respect to such forward-looking statements.

Our recently awarded Port and border security initiatives with Mexico's Defense Agency Sudano and the other international customer.

We anticipate that both programs will continue contribute substantial revenues in this fiscal year.

During Q1.

We successfully captured several ports and border security customer opportunities in the U S and internationally.

Alan Edrick: All forward-looking statements made in this call are based on currently available information. And the company undertakes no obligation to update any forward-looking statement based on subsequent events or new information or otherwise. During today's call, we will refer both to gap and non-gap financial measures when describing the company's results. For further information regarding non-gap measures and comparable gap measures of the company's results and a quantitative reconciliation of those figures, please refer to today's earnings release.

On the international front.

We announced an award of $414 million from Latin America based customer.

Wide multiple units.

Our Eagle <unk> high energy drive thru cargo and vehicle inspection system.

So the <unk> 50 at aviation portal monitors and many of these handheld backscatter devices, along with our proprietary search scan integration installation software and training and maintenance service and support.

Alan Edrick: I will begin with a high-level summary of our financial performance for the first quarter of fiscal 24 and then turn the call over to Deepak for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and a discussion of our outlook for fiscal year 24. Our first quarter financial results were generally solid with a security division, again, generating double-digit revenue growth and significant year-over-year operating margin expansion and the opt-of-division performing very well while the healthcare division experienced a challenging quarter.

In addition, we also announced a 10 million dollar contract from an international Customs Agency.

To provide dual energy excellent cargo and vehicle inspection solution, including multiyear maintenance service and support.

In the U S. We announced a $14 million award from an existing U S customer.

<unk> several works and installation support.

Cargo and vehicle inspection systems.

Alan Edrick: We are enthusiastic about the overall significant revenue and earnings growth anticipated for the balance of fiscal 24. Let's start with a high-level summary of our Q1 results. First, we reported Q1 revenues of 279 million, representing a year-over-year increase of 4% driven by revenue growth of 14% in our security division and 2% in the opt-of-division, which were partially offset by a 13% decrease in revenue in the healthcare division. Second, we reported Q1 non-gap adjusted earnings for share of 91 cents, up 5% from Q1 of the prior fiscal year, as strong operating results overcame the impact of approximately 11 cents per share of additional interest expense associated with higher interest rates in our borrowing. Third, we ended the quarter with a backlog of nearly 1.8 billion. The strong backlog provides outstanding visibility for the full fiscal year.

And wrapping it up in the ports and borders shortly after the quarter end.

We announced an award that we received in Q1 of a 10 year contract to provide turnkey screening solution to order wise Ministry of Economics and finance.

The Eagle 60 high energy trailer mounted Waco inspection system.

<unk> will be used to perform security screening and remote image analysis utilizing the proprietary search scan integration platform.

We will also provide onsite operator training.

Ongoing maintenance service and support.

I just wanted to talk a little bit more about our search scan software, which is our proprietary software solution that helps manage inspection image data traffic and vehicle identification at checkpoints.

Along with search skills utilization is a critical piece in a turnkey solution.

Utilized search scan frequently on traditional hardware installations as customers increasingly integrate screening systems with existing data and communication centers.

Deepak Chopra: Before diving more deeply into our financial results and discussing the fiscal 2024 outlook, I will turn the call over to Deepak. Thank you very much, Alan. Good morning, everyone. I'm pleased to report that our fiscal 2024 first quarter performance aligns with our expectations. We achieved 4% revenue growth with increased margins with a strong backlog coupled with a significant recent awards and high visibility into the opportunity pipeline. We expect significant revenue and adjusting adjusting earnings per year growth through fiscal 24 and beyond.

Are there more when new data manage infrastructure is required.

Specific program initiatives.

<unk> involved in supporting the planning and construction of these facilities.

To wipe program will join our longstanding successful turnkey projects like Bureau, nickel, Albania sector, where we have demonstrated our experience and capabilities and handling large scale programs for customs and border protection agencies.

We have an extensive presence with the U S customs and border protection CBP in United States, where we are actively supporting the resale border security efforts through equipment and service orders received to date for about $200 million.

Deepak Chopra: So let's dive into the performance and highlights of each division during the quarter and begin with the security division, which saw an increase of 14% in Q1 revenues and operating margin expression. The division had bookings of 174 million during the quarter resulting in a book to build ratio of 1.1. During the quarter, we made considerable progress on the ramp ups for our recently awarded both and border security initiatives with Mexico's defense agency Sedena and the other international customer.

The CBP is room under two active indefinite delivery indefinite quantity.

IDI cues that had a combined total potential award value of about $870 million.

Although the U S. Government is currently operating under a continuing resolution.

We're hopeful that additional orders could be issued once the U S. Government 24 budget is Boston signed into law.

Deepak Chopra: We anticipate that both programs will continue contribute substantial revenues in this fiscal year. During Q1, we successfully captured several port and border security customer opportunities in the US and internationally. Also, the VM250 radiation portal monitors and the minisies hand held back scattered devices along with a proprietary search scan integration installation software and training and maintenance service and support. In addition, we also announced a $10 million contract from an international customs agency to provide dual energy X-ray cargo and vehicle inspection solution, including multi and maintenance service and support.

Our checkpoint security products and related services team continues to support its customer base.

Airports.

Foundation.

Government facilities and other critical infrastructures.

Our latest explosive trace detection system.

The itemized at five X is now approved by the European Union for use at European airports.

Qualified by DSA AC STL for air cargo and certified by the China Aviation Authority, our CAC for use at airports.

The itemize, our buybacks as some of the most advanced software algorithms and optimize detection libraries, making it an ideal tool for identifying explosives narcotics and other harmful compounds.

We have been diligently collaborating with international airports regarding potential passenger and baggage screening announcements to align with the latest technology regulatory standards.

We remain optimistic about the continued expansion in the aviation Cte Jack point and checked baggage area together with the Itemizer fiber projects and have a good healthy backlog.

Deepak Chopra: In the US, we announced a $14 million award from an existing US customer to provide several works and installation support for our cargo and vehicle inspection systems. And wrapping it up in the ports and borders shortly after the quarter end, we announced an award that we received in Q1 of a 10-year contract to provide a turn to screening solution to Uruguay's Ministry of Economics and Finance. The Eagle P60 high energy trailer mounted vehicle inspection system will be used to perform security screening and remote image analysis utilizing the proprietary search scan integration platform.

Overall, the security Division had a great start for fiscal 'twenty, four and with a strong backlog.

Correct. It will do significantly better in the remainder of our fiscal 'twenty four.

Moving to the Optoelectronics and manufacturing division.

Opto delivered impressive results during the first quarter.

Another all time quarterly revenue record, achieving $96 million in revenue, including intercompany and generating strong profitability.

In addition to being a vital supplier.

Two our security and healthcare divisions.

Deepak Chopra: We will also provide on-site operator training, ongoing maintenance, service and support. I just want to talk a little bit more about our search scan software, which is our proprietary software solution that helps manage inspection, image data, traffic, and vehicle identification at checkpoints. Along with search scans utilization as a critical piece in a turnkey solution, we utilize search scan frequently on traditional hardware installations as customers increasingly integrate screening systems with existing data and communication centers.

<unk> continues to serve its diverse OEM customer base that provides various solutions in aerospace defense electronics test and measurement medical devices automotive and consumer electronics.

With a strong global presence manufacturing covering the U S, England, India, Indonesia, and Malaysia, combined with a continued trend of customers seeking robust manufacturing alternatives to China manufacturing.

We look forward to capturing new opportunities with our existing customer base and with new customers.

Finally onto the healthcare division.

Deepak Chopra: Furthermore, when new data managed infrastructure is required for specific program initiatives, we are often involved in supporting the planning and construction of these facilities. Uruguay program will join our long-standing successful turnkey projects like Pyrodeco, Albania, etc., where we have demonstrated our experience and capabilities in handling large-scale programs for customs and border protection agencies. We have an extensive presence with the US customs and border protection CBP in the United States, where we are actively supporting recent border security efforts through equipment and service orders received to date for about 200 million.

Q1 was a tough quarter as sales went down 13% year over year due to challenging marketing conditions.

Especially in the U S where hospital profitability has been hampered.

<unk> done as caused delays in capital expenditures.

Silver lining was growth in the European region.

By our recently launched cardiology products and services.

The capital constraints that hospitals are actually helping to drive market adoption of our new business model that we have talked before also that reduce the need for significant capital outlays.

This division continues to develop innovative new business models and solutions, such as leasing and subscription programs.

Deepak Chopra: The CBP has room under two active indefinite delivery, indefinite quantity that have IDIQs that have a combined total potential award value of about 870 million. Although the US government is currently operating under a continuing resolution, we are hopeful that additional orders could be issued once the US government's 24 budget is passed and signed into law. Our checkpoint security products and related services team continue to support its customer base in airports, transportation, government facilities, and other critical infrastructures.

Ultimate index based predictive analytics software and savings safe and sound patient alarm management software.

Good examples of tools that can help hospitals increase the efficiency of their existing patient monitoring infrastructure.

We continue to invest significantly in R&D and new product innovations.

Although <unk> been stocked well in.

First quarter <unk>.

Aspect its performance to improve during the rest of the year 'twenty four.

In summary, with significant backlog in <unk>, we are confident about our prospects in these divisions. We also expect more robust performance from health care as we look forward to the rest of the fiscal 'twenty four.

Deepak Chopra: Our latest explosive trace detection system, ETD, the itemizer 5X, is now approved by the European Union for use at European airports, qualified by TSA ACSTL for air cargo, and certified by the China Aviation Authority or CAC for use at airports. The itemizer 5X has some of the most advanced software algorithms and optimized detection libraries, making it an ideal tool for identifying explosives, narcotics, and other harmful compounds. We have been diligently collaborating with international airports regarding potential passenger and baggage screening announcements to align with the latest technology regulatory standards. We remain optimistic about the continued expansion in the aviation CT checkpoint and checked baggage area, together with the itemizer 5X projects and have a good healthy backlog.

With that I.

I will turn the call back over to <unk> to talk in more detail about our financial performance before opening the call for questions. Thank you.

Well, thank you Deepak.

Now I will review in greater detail the financial results for our fiscal 'twenty four first quarter again, our Q1 revenues were up 4% compared with out of the first quarter in the prior fiscal year.

Q1 Security Division revenues were up 14% largely due to the growth in our cargo and vehicle inspection products and related service revenue.

This included modest shipments from the $200 million plus cargo contract announced in January.

Aviation related revenues increased as well.

The book to Bill ratio in the Security Division for Q1 was $1, one leading to a record backlog in this division.

<unk> sales increased 2% year over year, driven primarily by strong intercompany sales to support anticipated security Division growth.

Deepak Chopra: Overall, the security division had a great start for fiscal 24 and with a strong backlog, we expect it will do significantly better in the remainder of fiscal Moving to the Opto Electronics and Manufacturing Division, Opto delivered impressive results during the first quarter with another all-time quarterly revenue record, achieving $96 million in revenue, including inter-company and generating strong profitability. In addition to being a vital supplier to our security and healthcare divisions, Opto continues to serve its diverse OEM customer base that provides various solutions in aerospace, defense electronics, test and measurement, medical devices, automotive and consumer electronics.

Which was partially offset by reduced third party revenues as certain after our customers are right sizing inventory levels or had programs delayed.

The health care Division as Deepak mentioned had a challenging first quarter with year over year revenues down, 13%, driven primarily by reduced patient monitoring product sales.

The fiscal 2000 for Q1 gross margin of 35, 4% was up significantly over the 32, 6% gross margin in Q1 last year. Despite.

The reduction in sales in health care, which is the division, which is the highest gross margin among our three divisions.

The gross margin expansion was led by the security Division, which experienced a favorable mix of sales along with the execution of certain operational improvements.

Deepak Chopra: With a strong global presence, manufacturing covering the US, England, India, Indonesia and Malaysia, combined with a continued trend of customer seeking robust manufacturing alternatives to China manufacturing, we look forward to capturing new opportunities with our existing customer base and with new customers.

Our gross margin will generally fluctuate from period to period based on revenue mix and volume inflation and impacts of changes in supply chain costs among other factors.

Moving to operating expenses.

Deepak Chopra: Finally, on to the healthcare division, where Q1, where the tough water as sales went down 13% year over year due to challenging marketing conditions, especially in the US, where hospital profitability has been hampered, which in turn has caused delays in capital expenditures. The silver lining was growth in the European region, backed by recently launched cardiology products and services. The capital constraints at hospitals are actually helping to drive market adoption of a new business model that we have talked before also, that reduced the need for significant capital outlets.

We continue to work diligently across each of our divisions to improve efficiency and to prudently manage our SG&A cost structure.

Q1, SG&A expenses were $59 8 million, representing a 12% increase over the prior year driven by less favorable FX and a lower level of bad debt recoveries in Q1 of fiscal 'twenty four compared to the prior year.

We do expect to leverage our SG&A for the full year fiscal 'twenty four we're such expenses are expected to decline as a percentage of sales on an annual basis.

Research and development expenses in Q1 of fiscal 'twenty four were $15 9 million up from $14 5 million in the same prior year quarter.

Deepak Chopra: This division continues to develop innovative new business models and solutions, such as leasing and subscription programs. The Rothman Index Base predictive analytics software and safe and sound patient alarm management software are good examples of tools that can help hospitals increase the efficiency of their existing patient monitoring infrastructure. We continue to invest significantly in R&D and new products innovations. Although healthcare didn't start well in first quarter, we expect its performance to improve during the rest of the year 24.

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, four we recorded <unk> 5 million of impairment restructuring and other charges compared to $1 $2 million of such charges in the comparable quarter of the prior fiscal year.

Moving to interest and taxes.

Net interest and other expenses in Q1 increased from $3 4 million in fiscal 'twenty three to $5 7 million in fiscal 'twenty four primarily due to increased interest rates on our borrowings we executed an interest rate swap during Q1 and fiscal 'twenty three to fix a portion of our floating rate bank debt.

Deepak Chopra: In summary, with significant backlog and security in APTO, we are confident about our prospects in these divisions. We also expect more robust performance from healthcare as we look forward to the rest of the fiscal 24.

On the tax side.

Alan Edrick: With that, I will turn the call back over to Alan Edrick to talk in more detail about our financial performance before opening the call for questions. Thank you. Well, thank you, Deepak.

The reported effective tax rate under GAAP was 23, 4% in Q1 of fiscal 'twenty four compared to 24, 4% in Q1 of fiscal 'twenty three.

In Q1 of this year, we recognized a discrete tax benefit of <unk> 4 million compared to zero point $1 million in Q1 of the last fiscal year.

Alan Edrick: Now I will review in greater detail the financial results for our fiscal 24 first quarter. Again, our Q1 revenues were up 4% compared with out of the first quarter in the prior fiscal year. Q1 security division revenues were up 14% largely due to the growth in our cargo and vehicle inspection products and related service revenue. This included modest shipments from the $200 million plus cargo contract announced in January. Aviation-related revenues increased as well.

Excluding the impact of discrete tax items, our normalized effective tax rate in Q1 fiscal 'twenty four was 25, 8% compared to a normalized effective tax rate of 25, 1% in Q1 of fiscal 'twenty three.

I will now turn to a discussion.

Of our non-GAAP adjusted operating margin.

Overall, our non-GAAP adjusted operating margin in the first quarter of fiscal 'twenty four increased to nine 6% from eight 7% in Q1 and fiscal 'twenty three.

Alan Edrick: The book-to-build ratio in the security division for Q1 was 1.1, leading to a record backlog in this division. Optosales increased 2% year-over-year, driven primarily by strong inter-company sales to support anticipated security division growth, which was partially offset by reduced third-party revenues as certain Optos customers are right-sizing inventory levels or had programs delayed.

Driven by strength in the security and Opto divisions.

The non-GAAP adjusted operating margin in the security Division expanded to 14, 3%.

In Q1 of this year from 12, 8% in Q1 of last year, primarily due to the mix of sales and operational improvements.

Alan Edrick: The healthcare division, as Deepak mentioned, had a challenging first quarter with year-over-year revenues down 13% driven primarily by reduced patient monitoring product sales. The fiscal 24Q1 gross margin of 35.4% was up significantly over the 32.6% gross margin in Q1 last year, despite the reduction in sales and healthcare, which is the division which is the highest gross margin among our three divisions. The gross margin expansion was led by the security division, which experienced a favorable mix of sales along with the execution of certain operational improvements. Our gross margin will generally fluctuate from period to period based on revenue mix and volume, inflation, and impacts of changes in supply chain cost among other factors.

The operating margin in our Opto Division.

Was again solid increasing to 12, 8% in the first quarter of fiscal 'twenty four from 12, 7% in last year's Q1.

And with the reduction in sales in the health care Division. This segment's adjusted operating margin was negligible.

Moving to cash flow cash provided by operations was $17 million in Q1 and fiscal 'twenty, four which was comparable to the prior year first quarter. Despite the significant build of inventory that we mentioned on our last earnings call would occur in preparation for program deliveries under the <unk>.

Two large security division contracts announced in fiscal 'twenty three.

Capex in the 2020 for fiscal first quarter was $5 2 million.

While depreciation and amortization in Q1 was $9 6 million.

Alan Edrick: Moving to operating expenses, we continue to work diligently across each of our divisions to improve efficiency and to prudently manage our SGNA cost structure. Q1 SGNA expenses were $59.8 million, representing a 12% increase over the prior year driven by less favorable effects and a lower level of bad debt recoveries in Q1 of fiscal 24 compared to the prior year. We do expect to leverage our SGNA for the full year fiscal 24, where such expenses are expected to decline as the percentage of sales on an annual basis.

Our balance sheet is solid with.

With modest net leverage of under one four and significant capacity for investments acquisitions and stock buybacks.

Aside from $7 5 million of annual required principal repayments under our bank term loan the bulk of our debt matures in fiscal 2007.

And finally turning to guidance.

We are reiterating our fiscal 'twenty four revenues and we are increasing our non-GAAP diluted EPS guidance.

We continue to expect our fiscal 'twenty for revenues to increase more than 18% over revenues in fiscal 'twenty three.

Alan Edrick: Research and development expenses in Q1 of fiscal 24 were $15.9 million, up from 14.5 million in the same prior year quarter. We continue to dedicate considerable resources to R&D, particularly in security and healthcare, 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 24, we recorded 0.5 million of impairment restructuring in other charges compared to 1.2 million of such charges in the comparable quarter of the prior fiscal year.

We expect our fiscal 2000 and for non-GAAP diluted EPS to grow more than 27% over our non-GAAP diluted EPS in fiscal 'twenty three.

This fiscal 'twenty, four non-GAAP diluted EPS guidance 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 guidance reflects reasonable estimates.

The actual impact on the company's financial results of timing changes unexpected revenues disruptions and increased costs in the supply chain and inflation and interest rates is difficult to predict and could vary significantly from the anticipated impact currently reflected in our estimates and guidance.

Alan Edrick: Moving to interest in taxes, net interest in other expenses in Q1 increased from 3.4 million in fiscal 23 to 5.7 million in fiscal 24, primarily due to increased interest rates in our borrowings. We executed an interest rate swap during Q1 of fiscal 23 to fix the portion of our floating rate bank debt. On the tax side, the reported effective tax rate under GAP was 23.4% in Q1 of fiscal 24 compared to 24.4% in Q1 of fiscal 23.

Actual revenues and non-GAAP earnings per diluted share could also vary from the guidance anticipated above due to other risks and uncertainties discussed in our SEC filings.

We continue to remain focused on the growth of our businesses and proactive management of our cost structure. We believe our efforts will enable OSI to continue providing innovative products and solutions.

Alan Edrick: In Q1 of this year, we recognized the discrete tax benefit of 0.4 million compared to 0.1 million in Q1 of the last fiscal year. Excluding the impact of discrete tax items, our normalized effective tax rate in Q1 fiscal 24 was 25.8% compared to a normalized effective tax rate of 25.1% in Q1 at fiscal 23.

We would like to take this opportunity to thank the global OSI systems team for its continued dedication in supporting our customers and partners and at this time wed like to open the call to questions.

Certainly and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone one moment for our first question. Our first question comes from the line of Josh Nichols from B Riley Your question. Please.

Alan Edrick: I will now turn to the discussion of our non-gap adjusted operating margin. Overall, our non-gap adjusted operating margin in the first quarter of fiscal 24 increased to 9.6% from 8.7% in Q1 at fiscal 23. Driven by strength in the security and optional divisions, the non-gap adjusted operating margin in the security division expanded to 14.3% in Q1 of this year from 12.8% in Q1 of last year, primarily due to the mix of sales and operational improvements.

Yes, Thanks for taking my question and it's really good to see the company with the New Turnkey Security Award here in Uruguay.

A couple of questions there Ben.

Ben Historically high margin awards for the company one how long do you expect for this to ramp up in any context, you could give us in terms of the potential size of the award.

Good morning, if theres a deeper.

Hello.

This is not a very large contract.

And it'll take us about six to eight months to get it going.

Alan Edrick: The operating margin in an optional division was again solid, increasing to 12.8% in the first quarter of fiscal 24 from 12.7% in last year's Q1. And with a reduction in sales in the healthcare division, this segment suggested operating margin was negligible.

And basically it's an dissimilar kind of sizes as the other contracts that we have.

And we are very very excited about it.

One of the things that we are very proud about it when we get these kind of turnkey contracts in different areas.

Become like centerpiece for the rest of the area to look at it and all of these turnkey contracts basically we are making it a point to say this helps the trade between Uruguay and for example, North America or Europe. So we continue to look at it that these kind of some big successes.

Alan Edrick: Moving to cash flow, cash provided by operations was 17 million in Q1 at fiscal 24, which was comparable to the prior year first quarter, despite the significant build of inventory that we mentioned on the last earnings call would occur in preparation for program deliveries under the two large security division contracts announced in fiscal 23. CapEx in the 2024 fiscal first quarter was 5.2 million, while depreciation and amortization in Q1 was 9.6 million.

Yeah.

Going forward Alex.

Do you want to add something.

I think that was good and Josh why we don't talk about margins on specific deals generally speaking the margins on our turnkey contracts or are nicely north of our overall corporate average.

Well, thanks for confirming that in the <unk>.

Alan Edrick: Our balance sheet is solid with modest net leverage of under 1.4 and significant capacity for investments, acquisitions and stock buybacks. Aside from 7.5 million of annual required principal repayments under our being term loan, the bulk of our debt, mature as in fiscal 27.

Company has really been building out security portfolio, you've been granted approval for <unk> with the TSA now to how should we think about the timing and opportunities specifically for ETD over the next say 12 to 18 months and how that could ramp up.

Alan Edrick: And finally turning to guidance. We are reiterating our fiscal 24 revenues, and we are increasing our non-GAAP diluted EPS guidance. We continue to expect our fiscal 24 revenues to increase more than 18% over revenues in fiscal 23. We expect our fiscal 24 non-GAAP diluted EPS to grow more than 27% over our non-GAAP diluted EPS in fiscal 23. This fiscal 24 non-GAAP diluted EPS guidance excludes potential impairment restructuring in other charges, amortization required intangible assets, the non-cash interest expense, and their associated tax effects, as well as discrete tax and other non-recurring items. We currently believe this guidance reflects reasonable estimates.

Well again, we're very proud about the certification.

It's a great product.

<unk>.

We do definitely know that in air cargo.

As a big revamp going on for new technology.

And we are very well poised for it in the international sector, we think that the growth will come even faster.

So we are very excited about it and <unk>.

We go back and look at and the performance of these units compared to the prior than existing products that we think that will continue to get a lot of success in this.

Thanks, Deepak and Alan I'll jump back in the queue.

Thank you one moment for our next question.

And our next question.

Alan Edrick: The actual impact on the company's financial results of timing changes on expected revenues, disruptions, and increased cost in the supply chain and inflation and interest rates is difficult to predict, and could very 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 guidance anticipated above due to other risks and uncertainties discussed in our SEC pilot. We continue to remain focused on the growth of our businesses and proactive management of our cost structure. We believe our efforts will enable OSI to continue providing innovative products and solutions.

From the line of Jeff Martin from Roth Capital Partners. Your question. Please.

Thanks, Hi, Deepak Hi, Alan.

I wanted to get a sense in terms of the timing on these two large orders that are going to be ramping up here pretty significantly.

How much is your visibility.

Visibility on timing improved over the last well since the Q4 call and also wanted to ask in terms of supply chain. If you are able to get components that you need I know youre ordering significantly more than normal.

An update there on both those.

Online is an experience that would be helpful.

Hey, Jeff This is Alan I'll take the first part of that question.

Operator: We would like to take this opportunity to thank the global OSI Systems team for its continued dedication in supporting our customers and partners, and at this time, we would like to open the call to questions. Certainly, and as a reminder, ladies and gentlemen, if you do have a question at this time, please write star 1-1 on your telephone. One moment for our first question.

Our visibility continues to improve as we go month by month on these two large contracts. There are as you would imagine a large contracts often evolving changes.

But we're really excited about it we do anticipate starting to see a real ramp up in revenues on these contracts beginning now in this quarter in Q2.

Which is really going to generate some significant revenue growth we believe.

Over the balance of fiscal 'twenty four so we expect that will always be some some changes to the timing and the schedule. That's the nature of the Beast in this industry, but the visibility continues to improve and the ramp up is happening as we speak.

Deepak Chopra: Couple questions there. These have been historically high margin awards for the company. One, how long do you expect for this to ramp up in any context you could give us in terms of the potential size of the award? Thanks.

Just to add onto this is deepak here.

Basically in the supply chain issue.

Deepak Chopra: Good morning. This is Deepak here. This is not a very large contract, and it will take us about six, eight months to get it going. And basically, it's in the similar kind of sizes as the other contracts that we have. And we're very, very excited about it, because one of the things that we are very proud about it, when we get these kind of turnkey contracts in different areas, they become like centerpiece for the rest of the area to look at it.

Handling it well and again I've said in the last conference call too.

Well position compared to other competitors, because we have intercompany resources also but definitely we cannot ignore the fact that when you ramp up so significantly so fast that there are definitely challenges in the supply chain.

We are addressing it and as Alan has mentioned that.

We will start seeing big growth from both of these contracts in Q2 almost into Q3 and Q4.

Deepak Chopra: And all these turnkey contracts, basically, we are making it a point to say this helps the trade between Uruguay and, for example, North America or Europe. So we continue to look at it like these kind of big successes of going forward. Alan, do you want to add something to it? I don't know. I think that was good. And Josh, while we don't talk about margins on specific deals, generally speaking, the margins on our turnkey contracts are nicely north of our overall corporate average.

Great and then my other question is with the.

With the unrest in the middle East does that create potential opportunities for you or are you seeing increased inquiries from countries in this round.

Stepping up their port and border equipment.

Factoring capabilities or other areas.

Plus I would like to say that we are very saddened with what's happened there.

We continue to pray for everybody's wellbeing.

I haven't seen any changes on this middle east team.

Deepak Chopra: Well, thanks for confirming that. The company has really been building out its security portfolio. You've been granted approval for ETD with the TSA now, too. How should we think about the timing and opportunities specifically for ETD over the next 12 to 18 months and how that could ramp up? Again, we are very proud about the certification. We think it's a great product. And we do definitely know that in air cargo, there's a big revamp going on for new technology.

Because obviously this is something new but on the Ukraine project and stuff definitely as.

Things mature in that area common sense is that countries around that area are all going to need more security equipment.

We continue to look at opportunities we are working with it at the same time funding is very important.

And as you know that the U S has been in a tough situation with what's happening in Washington as that opens up.

Both for the Middle East challenges and in Ukraine, Russia challenges.

Deepak Chopra: And we are very, very poised for it. In the international sector, we think that the growth will come even faster. So we are very excited about it. And as we go back and look at and the performance of these units compared to the present existing products there, we think that we'll continue to get a lot of success in this. Thanks, Deepak and Alan, our jump back in the queue. So thank you one moment for our next question.

We are very well positioned for any.

And to be procured.

Great. Thank you.

Thank you one moment for our next question.

Our next question comes from the line of Larry Solow from CJS Securities. Your question. Please.

Great. Thanks, guys.

Just I guess a follow up to the last question just on how the contracts are ramping.

Specifically, Alan just in terms of the increase in guidance.

Jeff Martin: And our next question comes from the line of Jeff Martin from Roth Capital Partners. Thanks, Heidi Bakio. I wanted to get a sense in terms of the timing on these two large orders that are going to be ramping up there pretty significantly.

Got it.

These factors are the segments, but.

I guess.

The increase.

I feel like is that coming from security is that just increased confidence there or what specifically.

Drives you to increase your <unk>.

Alan Edrick: How much has your visibility on timing improved or the last? Well, since the Q4 call and also one to ask in terms of supply chain, if you are able to get components that you need, I know you're ordering significantly more than normal, just an update there on both those timelines and experiences would be helpful.

<unk> this year.

Yes, great Great question Larry.

Your hunch is correct the growth and the EPS guidance is coming from our security business.

And our Q1 that we just reported we saw some nice operating margin expansion, which led to some stronger earnings and as we look out through the balance of the year and in some of the strength in that business.

Alan Edrick: Hey, Jeff, this is Alan. I'll take the first part of that question. Our visibility continues to improve as we go, you know, month by month on these two large contracts. There are, as you would imagine, on large contracts, often evolving changes, but we're really excited about it. We do anticipate starting to see a real ramp up in revenues on these contracts beginning now in this quarter in Q2, which is really going to generate some significant revenue growth we believe over the balance of fiscal 24.

That is really what's driven us to increase the overall EPS guidance.

Expect opto to continued to perform well.

In addition to that but a security that's leading to the growth and the EPS guidance.

Okay, and then I don't know if you gave us.

You gave a quad you quantified the book to Bill for security, but.

You have that that would be great, but just also just kind of qualitatively.

Obviously, the world is not getting safer place to opportunities in terms of your Q opportunity funnel of opportunities I think you usually like to prefer that.

Both within vehicle inspection our borders.

And outside of that other areas Hello, how are those trending and if you had the book to bill for the quarter.

Deepak Chopra: Just to add on to this deeper clear, basically in the supply chain issue, we're handling it well. And again, I said in the last conference calls, too, we are well positioned compared to other competitors because we have intercompany resources also. But definitely we cannot ignore the fact that when you ramp up so significantly, so fast that there are definitely challenges in the supply chain. We are addressing it. And as Alan has mentioned, that we will start seeing big growth from both these contracts in Q2, almost into Q3 and Q4.

Yeah. So Larry this is Alan the book to Bill in security was $1 one.

Please ask positions us in a record backlog so our highest backlog of all time for our security Division.

The visibility is strong the funnel of opportunities is.

Is real strong and robust.

Out the really throughout the world and the nature of our product lines, maybe day parts, you want to add to that yes.

Emphasized onto it that the opportunities are growing.

Both Hindi border area.

Air cargo and also in the aviation sector.

That had been on pretty much hold during the Covid time, and as it's coming out right. The traffic is increasing and there is a lot of interest to upgrade to new products and technology bolt in the <unk> in the RTD checkpoint and checked baggage area and we continue to look at it and we are very optimistic about the funnel.

Deepak Chopra: My other question is, with the unrest in the Middle East, does that create potential opportunities for you seeing increased inquiries from countries in the surrounding areas for stepping up their report and border equipment inspection capabilities or other areas?

Deepak Chopra: First, I would like to say that we are very saddened with what's happened there. We continue to pray for everybody's well-being. I haven't seen any changes on this Middle East thing because obviously this is something new. But on the Ukraine project and stuff, definitely as things mature in that area, common sense is that countries around that area are all going to need more security equipment. And we continue to look at opportunities.

Okay.

Just lastly, just shifting gears real fast on the health care.

Slower start to the year, then I think you had expected.

I guess two questions.

And I know again I don't know if you can share with us your thoughts, but maybe I know you had thought.

Segment would be up on both the revenue and operating profit basis on a full year basis, we still feel like that's attainable and then second part of that question is <unk>.

You mentioned sort of a shift to more of a leasing versus upfront sale of the equipment is that like.

In its infancy, thats still pretty small today and is that kind of coincide at all with you.

Deepak Chopra: We're working with it at the same time. Funding is very important. And as you know, that the US has been in a tough situation with what's happening in Washington, as that opens up, both for the Middle East challenges and in your current Russia challenges, we are very well positioned for any equipment to be procured. Thank you. One moment for our next question.

I think you're planning on next generation product coming out soon over the next couple of years.

To kind of correlate with one another.

Or any color on that.

Well good question.

Good analysis you've done.

On the equipment side definitely we were disappointed especially in U S.

D a.

Equipment sale.

I am sure know the hospitals are going through tough time there.

Larry Sullivan: And our next question comes from the line of Larry Sullivan from CJA Securities. Your question, please. Great. Thanks, guys. Just, I guess, a follow-up to the last question just on how the contracts are ramping. Just specifically, Alan, just in terms of the increase in guidance, I know you don't guide by the sectors or the segments, but I guess it's sort of the increase. I feel like, is that coming from security, is that just increased confidence there, or what specifically tries you to increase your EPS out this year?

There are two other things that what you asked one we've continued to do the R&D investment to develop the new platform.

The patient monitoring at the same time this new model that is in infancy that we have started the subscription and the software model to SaaS model.

A little different model, but interestingly Danielle this is catching on there is lot of interest, though it's something in the infantry new that we're doing but just think of it we've been doing this thing and the security side. So now to do that in the health care side, we at least know the building blocks now the question is how to educate our customers and how to be able to prove.

Larry Sullivan: Yeah, great question, Larry. And your hunch is correct. The growth in the EPS guidance is coming from our security business. You saw in our Q1 that we just reported, we saw some nice operating March expansion, which led to some stronger earnings. And as we look out through the balance of the year and some of the strength in that business, that is really what's driven us to increase the overall EPS guidance. We expect Opto to continue to perform well in addition to that, but a security that's leading to the growth in the EPS guidance.

To them, but I think longer term, we are quite excited about this new model of ongoing revenue what we call. It like the turnkey model that we have in the security side.

You want to add some share and answer your questions. Larry Yes, those new models are in their infancy, and we think theyre going to be growing nicely over over the coming years.

And our expectation the team's expectation is that the health care Division will grow for the full fiscal year <unk> and 'twenty for both on the topline and the bottom line.

Great excellent appreciate the color thanks, guys.

Larry Sullivan: Okay, I don't know if you gave a qualified to book the bill for security, but if you have that, that'd be great, but just kind of qualitatively, obviously, we're not getting to be a safer place. But opportunities, in terms of your Q opportunities, your final opportunities, I think you usually interpret that, both within vehicle inspection borders and outside of that and other areas, you know, how those trending and if you had the book to build for a clearer.

Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone.

For our next question.

Our next question comes from the line of Christopher Glynn from Oppenheimer. Your question. Please.

Thanks, a lot has been asked one follow up.

I think you said you expect on healthcare some.

Nice improvement starting sequentially really for the balance of the year relative to the first quarter.

It sounded like you were caught off guard a little bit in the first quarter quarter. After fourth quarter strength. So wondering how you would describe the visibility too.

Larry Sullivan: Yeah, so Larry, this is Alan, the book to build in security was 1.1 position in a record backlog. So our highest backlog of all time for our security division. The visibility is strong, the funnel of opportunities is real strong and robust throughout the world and the nature of our product lines, maybe deep off you want to add to that. Yeah, just what I'm emphasizing on to it, the opportunities are growing both in the ordered area, air cargo and also in the aviation sector.

Expected pick up there.

Well, yes, we are.

We are disappointed in the first quarter, but keep in mind that over the years.

Firstly, it's a single digit growth area and it's book and ship is not in backlog, David So some orders game.

<unk> came in in Q4 and Q1, we were expecting some it didn't happen.

Larry Sullivan: That had been on pretty much hold during the COVID time and as it's coming out, traffic is increasing and there is a lot of interest to upgrade to new products in technology, both in the itemizer and the RTT checkpoint and check bagging area. And we continue to look at it and we are very optimistic about the funnel. Okay, and just this last, we just shift to give us real fast on the healthcare.

So it is a little bit disappointing, but the team feels very much focused onto it that the remainder of the year.

We will get better.

And the innovation that we are doing bolt into software SaaS model and our continued development of a new product portfolio.

That's not going to have what I would call a significant impact in 2024.

Longer years focus right now is to be able to capture the accounts that we have and be able to work with the hospitals of alternates do them of making them more efficient pallet.

Larry Sullivan: Lower start to the year and I think you had expected. I guess two questions. And again, I don't know if you can share with us your thoughts, but maybe that I know you had thought the segment would be up on both the revenue and operating proper basis on a full year basis. If you still feel like that's incredible. And then second part of that question is, you mentioned sort of a shift to more of a leasing versus up front sale of the equipment, is that like in its impancies, that's still pretty small today.

Yes, I think that describes it well.

Okay.

Nice to see positive free cash flow in the first quarter, it's often a challenging seasonal quarter and in particular.

This year just ahead of significant ramps at security.

So wondering if you could give some color on.

Larry Sullivan: And is that kind of coincide at all with your perhaps you're planning on next generation product coming out soon over the next couple of years is that those two kind of call it one another. That'd be great for any column. Well, good question, good analysis you've done. On the equipment side, definitely, we were disappointed, especially in US, with the equipment sale. As you, I'm sure, no, the hospitals are going to stop tough time.

What sort of levels range metrics around free cash flow, we should be looking for this year.

Chris This is Alan.

Good question, so while we don't provide free cash flow guidance, we would we.

We would agree with your statement in light of growing our revenue growing our inventory by $80 million to support the large security contracts still generating.

$17 million or so of operating cash flow was was quite strong in Q1, as we look out there'll be some continued buildup in inventory for these contracts we think worthy.

Larry Sullivan: There are two other things that what you asked, one, we continue to do the R&D investment to develop the new platform of the patient monitoring. At the same time, this new model that is in the infancy that we have started, the subscription and the software model, the SaaS model. It's a little different model. But interestingly, this is catching on. There's a lot of interest though, it's something in the infancy new that we are doing.

Real real significant free cash flow could be driven is in fiscal 'twenty five fiscal 'twenty six and beyond I mean, we've historically been a very strong generator of free cash flow, we think that strength will only increase.

As we move beyond this fiscal year, we do expect to generate nice free cash flow this year, but the real strength in the free cash flow.

Larry Sullivan: But just think of it, we've been doing this thing in the security side. So now to do that in the healthcare side, we at least know the building blocks. Now the question is how to educate the customers and how to be able to prove to them. But I think longer term, we are quite excited about this. This new model of ongoing revenue, what we call it like the turnkey model that we have in the security side.

We will begin.

And the subsequent fiscal year is our current expectation.

Okay, and then just one on <unk> and.

Manufacturing.

Really looking very sturdy.

A lot of short cycle volatility out there.

From Oems and distribution impacting a lot of names and.

Larry Sullivan: Alan, you want to add something? Sure, and to your questions, Larry, yes, those new models are in their infancy. And we think they're going to be growing nicely over the coming years. And in our expectation, you know, the team's expectation is that the healthcare division will grow for the full fiscal year and in 24, both on the top line in the bottom line. Great. Excellent. Appreciate the comment. Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. One moment for our next question.

Just curious if you could describe a little bit about what's giving.

That stability, particularly how externals performed and if youre seeing a regular cadence.

Wallet share.

Actions with your global customers.

They try to Derisk our supply chain.

Well again, a very good question, it's a denser marketplace.

Basically in some cases, it's a very predictable customer base.

Larry Sullivan: Our next question comes from the line of Christopher Glenn from Oppenheimer. Your question, please. Thanks. A lot's been asked. One follow-up, but I think you said you expect on healthcare some nice improvement starting sequence. So, you know, I think you're going to have a little bit of a little bit in the first quarter, you know, after some fourth quarter strength.

Worked with the Oems and we continue to look at it but they are also going through.

Basically inventory increase stop it goes longer term.

So.

It's a continuing evolving matter the thing that really makes us very very good compared to our competitors. One is you have a very broad customer base.

Aerospace defense to automotive medical consumer name. It we are in all spaces. So as a group all of those areas somewhat weak how much strong and the second thing that we keep saying it and I've said, it before and I'll say it again.

Deepak Chopra: So, what, wondering how you describe the visibility to the expected pick up there? Well, no, yes, we are disappointed in the first quarter, but keep in mind that over the years, firstly, it's a single digit growth area and it's book and ship. There's not a backlog driven. So some orders came in in Q4 in Q1. We were expecting some. It didn't happen. So, it is a little bit disappointing, but the team feels very much focused on to it that the remainder of the year will get better and the innovation that we are doing both in the software SaaS model and our continued development on the new product portfolio.

Our global presence of manufacturing is a big advantage and lately you've heard it everywhere that there's a lot of talk about alternate to China, and we have the ability both in Asia and in U S and in Europe.

Manufactured products from our customers. So we look at this business as a a very well thought out business predictable business.

But like I said this is a focus of the business depending on our customer base.

Alan.

I think that says it well.

Deepak Chopra: That's not going to have what I would call a significant impact in 2024. It's for a longer years. Focus right now is to be able to capture the accounts that we have and be able to work with the hospitals of alternates to them of making them more efficient.

Great. Thank you.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to management for any further remarks.

Well, thank you very much and we again want to thank all the employees of the company and all of that already.

Alan Edrick: Now, I think that describes it well. Okay, and it was nice to see positive free cash flow in the first quarter. It's often a challenging seasonal quarter and in particular, you know, this year, just ahead of significant ramps and security. So, wondering if you could give some color on what sort of levels range metrics around free cash flow.

Customers and everybody else, including the stockholders and not to forget the analysts.

We are very excited about the rest of the year backlog is there to support it and we're looking at a lot of other opportunities and we think that the balance of the year starting in Q2, and Q3 Q4 will be very strong.

Alan Edrick: We should be looking for this.

Thank you very much Dr <unk>.

Alan Edrick: Chris, this is Alan. Good question. So while we don't provide free cash flow guidance, we would agree with your statement in light of growing our inventory by 80 million to support the large security contracts still generating 17 million or so of operating cash flow was quite strong in Q1. As we look out, there will be some continued buildup in inventory for these contracts.

In January.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Okay.

Thanks.

Alan Edrick: We think where the real, real significant free cash flow could be driven is in fiscal 25, fiscal 26 and beyond. I mean, we've historically been a very strong generator of free cash flow. We think that strength will only increase, you know, as we move beyond this fiscal year. We do expect to generate nice free cash flow this year, but the real strength in the free cash flow will begin in the subsequent fiscal year is our current expectation.

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Deepak Chopra: Okay, and then just one on up to and manufacturing, really looking very sturdy, you know, a lot of short cycle volatility out there from OEMs and distribution, impacting a lot of names. And just so curious if you could describe a little bit about what's giving, you know, that's the ability, particularly how externals performed. And, you know, if you're seeing a regular cadence of, you know, wallet share additions with your global customers as they try to de-risk supply chain.

Sure.

Okay.

Deepak Chopra: Well, again, a very good question. It's a different marketplace. You know, basically in some cases, it's a very predictable customer base. We worked with the OEMs and we continue to look at it, but they're also going through basically inventory increase, stop it, go longer term. So that is it's a continuing evolving matter.

Deepak Chopra: The thing that really makes us very, very good compared to our competitors. One is they have a very broad customer base from aerospace defense to automotive medical consumer name it. We're in all spaces. So as a group, all those areas, some are weak, some are strong.

Deepak Chopra: And the second thing that we keep saying it, and I've said it before and I said again, our global presence of manufacturing is a big advantage. And lately you've heard it everywhere that there's a lot of talk about alternate to China. And we have the ability both in Asia and in US and in Europe to manufacture products for my customers. So we look at this business as a very well thought out business, predictable business. But like I said, this is a focus of the business, depending on a customer base. I think that says it well.

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You'd like to remove yourself from the queue simply press Star One again as a reminder, today's program is being recorded and now I'd like to introduce your host for todays program Alan Edric, Chief Financial Officer. Please go ahead Sir.

Good morning, and thank you for joining us I'm, Alan <unk> Executive Vice President and CFO of OSI systems, and I'm here today with Deepak Chopra.

<unk> President and CEO.

Welcome to the OSI systems fiscal 2024 first quarter conference call. We are pleased that you can join US as we review our financial and operational results.

Earlier today, we issued a press release announcing our 2020 for fiscal year first quarter financial results and before we discuss our 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 1900.

Five.

During today's call, we will refer both to GAAP and non-GAAP financial measures when describing the company's results.

For further information regarding non-GAAP measures and comparable GAAP measures of the company's results and a quantitative reconciliation of those figures. Please refer to today's earnings release.

We will then finish with more detail regarding our financial results and a discussion of our outlook for fiscal year 'twenty four.

Our first quarter financial results were generally solid with the security Division again generating double digit revenue growth and significant year over year operating margin expansion.

In the Opto division performing very well.

While the healthcare division experienced a challenging quarter.

We are enthusiastic about the overall significant revenue and earnings growth anticipated for the balance of fiscal 'twenty four.

Let's start with a high level summary of our Q1 results.

First we reported Q1 revenues of $279 million.

Representing a year over year increase of 4% driven by revenue growth of 14% in our security Division and 2% in the Opto Division, which were partially offset by a 13% decrease in revenue in the health care Division.

Second.

We reported Q1 non-GAAP adjusted earnings per share of <unk> 91.

Third we ended the quarter with a backlog of nearly $1 8 billion <unk>.

This strong backlog provides outstanding visibility for the full fiscal year.

Before diving more deeply into our financial results.

And discussing the fiscal 2024 outlook I will turn the call over to Deepak.

Thank you very much Allen.

Good morning to everyone.

Alan Edrick: Agreed.

I am pleased to report that our fiscal 2024, our first quarter performance aligned with our expectations.

Operator: Thank you.

We achieved 4% revenue growth with increased margins.

Operator: This does conclude the question and answer session of today's program.

With our strong backlog coupled with the significant recent awards and high visibility into the opportunity pipeline we have.

Expect significant revenue and adjusting adjusted earnings per share growth through fiscal 'twenty and beyond.

So let's dive into the performance and highlights of each division during the quarter and begin with our security Division, which saw an increase of 14% in Q1 revenues and operating margin expansion.

Deepak Chopra: I'd like to hand the program back to management for any further remarks. Well, thank you very much. And we again want to thank all the employees of the company and all the customers and everybody else including the stockholders and not to forget the analysts. We are very excited about the rest of the year. Backlog is there to support it. And we're looking at a lot of other opportunities. And we think that the balance of the year starting in Q2 into Q3, Q4 will be very strong. Thank you very much. Thank you in January.

The division had bookings of $174 million during the quarter, resulting in a book to bill ratio of one one.

Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does include the program. You may now disconnect. Good day. Thank you very much. .

Operator: Thank you for standing by and welcome to the OSI Systems First Quarter 2024 conference call. At this time, all participants are in a listen only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded.

During the quarter.

We made considerable progress on the ramp ups.

Operator: And now I'd like to introduce your host for today's program, Alan Edrick, Chief Financial Officer. Please go ahead there. Oh, good morning. And thank you for joining us.

Our recently awarded Port and border security initiatives with Mexico's Defense Agency Sudano.

And the other international customer.

We anticipate that both programs will continue contribute substantial revenues in this fiscal year.

During Q1.

We successfully captured several port and border security customer opportunities in the U S and internationally.

Alan Edrick: And before we discuss the results, however, I'd like to remind everyone that today's discussion will include forward-looking statements in 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 in this call are based on currently available information, and the company undertakes no obligation to update any forward-looking statement based on subsequent events or new information or otherwise.

On the international front.

We announced an award of $414 million from Latin America based customer.

Alan Edrick: During today's call, we will refer both to GAP and non-GAP financial measures when describing the company's results. For further information regarding non-GAP measures and comparable GAP measures of the company's results and a quantitative reconciliation of those figures, please refer to today's earnings release.

To provide multiple units of our Eagle <unk> high energy drive thru cargo and vehicle inspection system.

Also the VM to 50 at aviation portal monitors and many of these handheld backscatter devices, along with our proprietary search scan integration installation software.

Alan Edrick: I will begin with a high-level summary of our financial performance for the first quarter of fiscal 24, and then turn the call over to Deepak for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and the discussion of our outlook for fiscal year 24. Our first quarter financial results were generally solid, with a security division again generating double-digit revenue growth and significant year-over-year operating margin expansion, and the Opto division performing very well, while the healthcare division experienced a challenging quarter. We are enthusiastic about the overall significant revenue and earnings growth anticipated for the balance of fiscal 24.

Training and maintenance service and support.

In addition, we also announced a 10 million dollar contract from an international Customs Agency.

To provide dual energy excellent cargo and vehicle inspection solution, including multiyear maintenance service and support.

In the U S. We announced a $14 million award from an existing U S customer to provide civil works and installation support.

Cargo and vehicle inspection systems.

And wrapping it up in the ports and borders shortly after the quarter end.

We announced an award that we received in Q1 of a 10 year contract to provide it down disk screening solution to order wise Ministry of Economics and finance.

Alan Edrick: Let's start with a high-level summary of our Q1 results. First, we reported Q1 revenues of 279 million, representing a year-over-year increase of 4% driven by revenue growth of 14% in our security division and 2% in the Opto division, which were partially offset by a 13% decrease in revenue in the healthcare division. Second, we reported Q1 non-gap adjusted earnings per share of 91 cents, up 5% from Q1 of the prior fiscal year, as strong operating results overcame the impact of approximately 11 cents per share of additional interest expense associated with higher interest rates in our borrowers. Third, we ended the quarter with a backlog of nearly 1.8 billion. The strong backlog provides outstanding visibility for the full fiscal year.

The Eagle <unk> high energy trailer mounted Waco inspection system.

Will be used to perform security screening and remote image analysis utilizing the proprietary search scan integration platform.

We will also provide onsite operator training ongoing maintenance service and support.

I just wanted to talk a little bit more about our search scan software.

Which is our proprietary software solution that helps manage inspection image data traffic and rightful identification object points.

Along with <unk> utilization as a critical piece in a turnkey solution.

We utilized third scan frequently on traditional hardware installations as customers increasingly integrate screening systems with existing data and communication centers.

Deepak Chopra: Before diving more deeply into our financial results, and discussing the fiscal 2024 outlook, I will turn the call over to Deepak. Thank you very much, Alan. Good morning to everyone.

Furthermore, when new data manage infrastructure is required.

Deepak Chopra: I'm pleased to report that our fiscal 2024 first quarter performance aligns with our expectations. We achieved 4% revenue growth with increased margins with a strong backlog coupled with a significant recent awards and high visibility into the opportunity pipeline. We expect significant revenue and adjusting adjusted earnings per year growth through fiscal 24 and beyond.

More specific program initiatives, we are often involved in supporting the planning and construction of these facilities.

The worldwide program will join our longstanding successful turnkey projects like Bureau, nickel, Albania sector, where we have demonstrated our experience and capabilities and handling large scale programs for customs and border protection agencies.

We have an extensive presence with the U S customs and border protection CBP in United States, where we are actively supporting the recent border security efforts through equipment and service orders received to date for about $200 million.

Deepak Chopra: So let's dive into the performance and highlights of each division during the quarter and begin the security division, which saw an increase of 14% in Q1 revenues and operating margin expression. The division had bookings of 174 million during the quarter, resulting in a book to build ratio of 1.1. During the quarter, we made considerable progress on the ramp-ups for our recently awarded both and border security initiatives with Mexico's defense agency Sedena and the other international customer.

The CVP as room under two.

Two active indefinite delivery indefinite quantity.

At that time.

I'd use that as a combined total potential award value of about $870 million.

Although the U S. Government is currently operating under a continuing resolution we are hopeful that additional orders could be issued once the U S government 24 budget as Boston signed into law.

Deepak Chopra: We anticipate that both programs will continue to contribute substantial revenues in this fiscal year. During Q1, we successfully captured several port and border security customer opportunities in the US and internationally. Also, the VM250 radiation portal monitors and the minisies hand held back scattered devices along with a proprietary search scan integration installation software and training and maintenance service and support. In addition, we also announced a $10 million contract from an international custom agency to provide dual energy X-ray cargo and vehicle inspection solution, including multi-year maintenance service and support.

Our checkpoint security products and related services team continues to support its customer base and airports transportation government facilities and other critical infrastructures.

Latest explosive trace detection system.

<unk> X is now approved by the European Union for use at European airports qualified by DSA.

STL for air cargo and certified by the China Aviation authority or Tac for use at airports.

The itemize, our buybacks as some of the most advanced software algorithms and optimize detection libraries, making it an ideal tool for identifying explosives narcotics and other harmful compounds.

We have been diligently collaborating with international airports regarding potential passenger and baggage screening announcements to align with the latest technology regulatory standards.

We remain optimistic about the continued expansion of the aviation CD, Jack point and checked baggage area together with the <unk> five S projects and have a good healthy backlog.

Overall, the security Division had a great start for fiscal 'twenty, four and with a strong backlog, we expect it will do significantly better in the remainder of our fiscal 'twenty four.

Deepak Chopra: We announced an award that we received in Q1 of a 10-year contract to provide a turnties screening solution to Uruguay's Ministry of Economics and Finance. The Eagle P60 high energy trailer mounted vehicle inspection system will be used to perform security screening and remote image analysis utilizing the proprietary search scan integration platform. We will also provide on-site operator training ongoing maintenance service and support. I just want to talk a little bit more about our search scan software, which is our proprietary software solution that helps manage inspection image data, traffic and vehicle identification at checkpoints.

Moving to the Optoelectronics and manufacturing division.

Opto delivered impressive results during the first quarter with another all time quarterly revenue record.

Moving $96 million in revenue, including intercompany and generating strong profitability.

In addition to being a vital supplier.

Our security and healthcare divisions Opto continues to serve its diverse OEM customer base that provides various solutions in aerospace defense electronics test and measurement medical devices automotive and consumer electronics.

A strong global presence manufacturing covering the U S, England, India, Indonesia, and Malaysia, combined with a continued trend of customers seeking a robust manufacturing alternatives to China manufacturing.

Deepak Chopra: Along with search scans utilization as a critical piece in a turnkey solution, we utilize search scan frequently on traditional hardware installations as customers increasingly integrate screening systems with existing data and communication centers. Furthermore, when new data managed infrastructure is required for specific program initiatives, we are often involved in supporting the planning and construction of these facilities. The Uruguay program will join our long-standing successful turnkey projects like Pyroreco, Albania, etc., where we have demonstrated our experience and capabilities in handling large scale programs for customs and border protection agencies.

We look forward to capturing new opportunities with our existing customer base and with new customers.

Finally onto the healthcare division.

Where Q1 was a tough quarter as sales went down 13% year over year due to challenging marketing conditions, especially in the U S where hospital profitability has been hampered which <unk> done as caused delays in capital expenditures.

The silver lining was growth in the European region backed by our recently launched cardiology products and services.

The capital constraints that hospitals are actually helping to drive market adoption of our new business model that we have talked before also.

Deepak Chopra: We have an extensive presence with the U.S. Customs and Border Protection CBP in the United States, where we are actively supporting recent border security efforts through equipment and service orders received to date for about 200 million. We remain optimistic about the continued expansion in the aviation CT checkpoint and checks baggage area, together with the itemizer 5X projects and have a good healthy backlog.

That reduces the need for significant capital outlays.

This division.

Tenuous to develop innovative new business models and solutions, such as leasing and subscription programs.

The Ultimate index based predictive analytics software and save and safe and sound patient alarm management software.

Good examples of tools that can help hospitals increase the efficiency of their existing patient monitoring infrastructure.

We continue to invest significantly in R&D and new product innovations.

Although <unk> been stocked well in.

First quarter <unk>.

Aspect its performance to improve during the rest of the year 'twenty four.

With that.

I will turn the call back over to <unk> to talk in more detail about our financial performance before opening the call for questions. Thank you.

Well, thank you Deepak.

Now I will review in greater detail the financial results for our fiscal 'twenty four first quarter again, our Q1 revenues were up 4% compared with out of the first quarter in the prior fiscal year.

Q1 Security Division revenues were up 14% largely due to the growth in our cargo and vehicle inspection products and related service revenue.

This included modest shipments from the $200 million plus cargo contract announced in January.

Aviation related revenues increased as well.

The book to Bill ratio in the Security Division for Q1 was $1, one leading to a record backlog in this division.

<unk> sales increased 2% year over year, driven primarily by strong intercompany sales to support anticipated security Division growth, which was partially offset by reduced third party revenues as certain after our customers are right sizing inventory levels or had programs delayed.

Deepak Chopra: Overall, the security division had a great start for fiscal 24 and with a strong backlog, we expect it will do significantly better in the remainder of fiscal 24.

Deepak Chopra: Moving to the Opto Electronics and Manufacturing Division, Opto delivered impressive results during the first quarter with another all-time quarterly revenue record, achieving $96 million in revenue, including inter-company and generating strong profitability. In addition to being a vital supplier to our security and healthcare divisions, Opto continues to serve its diverse OEM customer base that provides various solutions in aerospace, defense electronics, test and measurement, medical devices, automotive and consumer electronics. With a strong global presence, manufacturing covering the U.S., England, India, Indonesia, and Malaysia, combined with a continued trend of customer seeking robust manufacturing alternatives to China manufacturing, we look forward to capturing new opportunities with our existing customer base and with new customers.

The health care Division as Deepak mentioned had a challenging first quarter with year over year revenues down, 13%, driven primarily by reduced patient monitoring product sales.

The fiscal 2000 for Q1 gross margin of 35, 4% was up significantly over the 32, 6% gross margin in Q1 last year. Despite.

The reduction in sales in health care, which is the division, which is the highest gross margin among our three divisions.

The gross margin expansion was led by the security Division, which experienced a favorable mix of sales along with the execution of certain operational improvements.

Our gross margin will generally fluctuate from period to period based on revenue mix and volume inflation and impacts of changes in supply chain costs among other factors.

Moving to operating expenses.

Deepak Chopra: Finally, on to the healthcare division, where Q1, where the tough water as sales went down, 13% year over year due to challenging marketing conditions, especially in the U.S., where hospital profitability has been hampered, which in turn has caused delays in capital expenditures. The silver lining was growth in the European region, backed by recently launched cardiology products and services. The capital constraints and hospitals are actually helping to drive market adoption of a new business model that we have talked before also, that reduced the need for significant capital outlies.

We continue to work diligently across each of our divisions to improve efficiency and to prudently manage our SG&A cost structure.

We do expect to leverage our SG&A for the full year fiscal 'twenty four we're such expenses are expected to decline as a percentage of sales on an annual basis.

Research and development expenses in Q1 of fiscal 'twenty four were $15 9 million up from $14 5 million in the same prior year quarter.

Deepak Chopra: This division continues to develop innovative new business models and solutions, such as leasing and subscription programs. The Rothman Index-based predictive analytics software and safe and sound patient alarm management software are good examples of tools that can help hospitals increase the efficiency of their existing patient monitoring infrastructure. We continue to invest significantly in R&D and new products innovations, although healthcare didn't start well in first quarter, we expect its performance to improve during the rest of the year 24.

We continue to dedicate considerable resources to R&D <unk>.

Particularly in security and healthcare 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, four we recorded <unk> $5 million of impairment restructuring and other charges compared to $1 $2 million of such charges in the comparable quarter of the prior fiscal year.

Moving to interest and taxes.

Net interest and other expenses in Q1 increased from $3 4 million in fiscal 'twenty three to $5 7 million in fiscal 'twenty four primarily due to increased interest rates on our borrowings.

Deepak Chopra: In summary, with significant backlog in security and apto, we are confident about our prospects in these divisions. We also expect more robust performance from healthcare as we look forward to the rest of the fiscal 24.

We executed an interest rate swap during Q1 and fiscal 'twenty three to fix a portion of our floating rate bank debt.

On the tax side, the reported effective tax rate under GAAP was 23, 4% in Q1 of fiscal 'twenty four compared to 24, 4% in Q1 of fiscal 'twenty three.

In Q1 of this year, we recognized a discrete tax benefit of <unk> 4 million compared to zero point $1 million in Q1 of the last fiscal year.

Alan Edrick: Now I will review in greater detail the financial results for our fiscal 24-first quarter. Again, our Q1 revenues were up 4% compared with out of the first quarter in the prior fiscal year. Q1 security division revenues were up 14%, largely due to the growth in our cargo and vehicle inspection products and related service revenue. This included modest shipments from the $200 million plus cargo contract announced in January. Aviation-related revenues increased as well.

Excluding the impact of discrete tax items, our normalized effective tax rate in Q1 fiscal 'twenty four was 25, 8% compared to a normalized effective tax rate of 25, 1% in Q1 of fiscal 'twenty three.

I will now turn to a discussion.

Of our non-GAAP adjusted operating margin.

Overall, our non-GAAP adjusted operating margin in the first quarter of fiscal 'twenty four increased to nine 6% from eight 7% in Q1 and fiscal 'twenty three.

Alan Edrick: The book to bill ratio in the security division for Q1 was 1.1 leading to a record backlog in this division. Opto sales increased 2% year-over-year, driven primarily by strong inter-company sales to support anticipated security division growth, which was partially offset by reduced third-party revenues as certain Opto customers are right-sizing inventory levels or had programs delayed.

Driven by strength in the security and Opto divisions.

The non-GAAP adjusted operating margin in the security Division expanded to 14, 3% in Q1 of this year from 12, 8% in Q1 of last year, primarily due to the mix of sales and operational improvements.

Alan Edrick: The healthcare division, as Deepak mentioned, had a challenging first quarter with year-over-year revenues down 13% driven primarily by reduced patient monitoring product sales. The fiscal 24Q1 gross margin of 35.4% was up significantly over the 32.6% gross margin in Q1 last year, despite the reduction in sales and healthcare, which is the division which is the highest gross margin among our three divisions. The gross margin expansion was led by the security division, which experienced a favorable mix of sales along with the execution of certain operational improvements. Our gross margin will generally fluctuate from period to period based on revenue, mix and volume, inflation, and impacts of changes in supply chain cost among other factors.

The operating margin there in our Opto Division.

Was again solid increasing to 12, 8% in the first quarter of fiscal 'twenty four from 12, 7% in last year's Q1.

And with the reduction in sales in the health care Division. This segment's adjusted operating margin was negligible.

Two large security division contracts announced in fiscal 'twenty three.

Capex in the 2020 for fiscal first quarter was $5 2 million.

While depreciation and amortization in Q1 was $9 6 million.

Alan Edrick: Moving to operating expenses, we continue to work diligently across each of our divisions to improve efficiency and to prudently manage our S-GNA cost structure. Q1 S-GNA expenses were $59.8 million, representing a 12% increase over the prior year driven by less favorable effects and a lower level of bad debt recoveries in Q1 of fiscal 24 compared to the prior year. We do expect to leverage our S-GNA for the full year of fiscal 24, where such expenses are expected to decline as the percentage of sales on an annual basis.

Our balance sheet is solid with.

With modest net leverage of under one four and significant capacity for investments acquisitions and stock buybacks.

Aside from $7 5 million of annual required principal repayments under our bank term loan the bulk of our debt matures in fiscal 2007.

And finally turning to guidance.

We are reiterating our fiscal 'twenty four revenues and we are increasing our non-GAAP diluted EPS guidance.

We continue to expect our fiscal 'twenty for revenues to increase more than 18% over revenues in fiscal 'twenty three.

Alan Edrick: Research and development expenses in Q1 of fiscal 24 were 15.9 million, up from 14.5 million in the same prior year quarter. 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 24, we recorded 0.5 million of impairment restructuring and other charges compared to 1.2 million of such charges in the comparable quarter of the prior fiscal year.

We expect our fiscal 'twenty, four non-GAAP diluted EPS to grow more than 27% over our non-GAAP diluted EPS in fiscal 'twenty three.

This fiscal 'twenty, four non-GAAP diluted EPS guidance 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 guidance reflects reasonable estimates.

The actual impact on the Companys financial results of timing changes unexpected revenues disruptions and increased costs in the supply chain and inflation and interest rates is difficult to predict and could vary significantly from the anticipated impact currently reflected in our estimates and guidance.

Alan Edrick: Moving to interest in taxes, net interest and other expenses in Q1 increased from 3.4 million of fiscal 23 to 5.7 million in fiscal 24, primarily due to increased interest rates in our borrowings. We executed an interest rate swap during Q1 of fiscal 23 to fix the portion of our floating rate bank debt. On the tax side, the reported effective tax rate under DAP was 23.4% in Q1 of fiscal 24 compared to 24.4% in Q1 of fiscal 23.

Actual revenues and non-GAAP earnings per diluted share could also vary from the guidance anticipated above due to other risks and uncertainties discussed in our SEC filings.

Alan Edrick: In Q1 of this year, we recognized the discrete tax benefit of 0.4 million compared to 0.1 million in Q1 of the last fiscal year. Excluding the impact of discrete tax items, our normalized effective tax rate in Q1 and fiscal 24 was 25.8% compared to a normalized effective tax rate of 25.1% in Q1 at fiscal 23.

Alan Edrick: I will now turn to the discussion of our non-gap adjusted operating margin. Overall, our non-gap adjusted operating margin in the first quarter of fiscal 24 increased to 9.6% from 8.7% in Q1 at fiscal 23, driven by strength in the security and optional divisions. The non-gap adjusted operating margin in the security division expanded to 14.3% in Q1 of this year from 12.8% in Q1 of last year, primarily due to the mix of sales and operational improvements. The operating margin in an optional division was again solid, increasing to 12.8% in the first quarter of fiscal 24 from 12.7% in last year's Q1.

Yes, Thanks for taking my question and it's really good to see the company with the New Turnkey Security Award here in Uruguay.

A couple of questions there Ben.

Ben Historically high margin awards for the company one how long do you expect for this to ramp up in any context, you could give us in terms of the potential size of the award.

Good morning, this is deepak here.

Okay.

This is not a very large contract.

And it'll take us about six to eight months to get them going.

And basically it's an dissimilar kind of sizes as the other contracts that we have.

We are very very excited about it.

One of the things that we are very proud about it when we get these kind of turnkey contracts in different areas.

Alan Edrick: And with the reduction in sales in the healthcare division, this segment suggested operating margin was negligible.

Become like centerpiece for the rest of the area to look at it and all of these turnkey contracts basically we are making it a point to say this helps the trade between Uruguay and for example in North America or Europe. So we continue to look at it that these kind of some big successes.

Alan Edrick: Moving to cash flow, cash provided by operations was 17 million in Q1 at fiscal 24, which was comparable to the prior year first quarter despite the significant build of inventory that we mentioned on the last earnings called would occur in preparation for program deliveries under the two large security division contracts announced in fiscal 23. CapEx in the 2024 fiscal first quarter was 5.2 million, while depreciation and amortization in Q1 was 9.6 million.

Yeah.

Going forward, Alan do you want to add something.

I think that was good and Jos while we don't talk about margins on specific deals generally speaking the margins on our turnkey contracts are are nicely north of our overall corporate average.

Well, thanks for confirming that then the <unk>.

Alan Edrick: And finally turning to guidance. We are reiterating our fiscal 24 revenues, and we are increasing our non-gap diluted EPS guidance. We continue to expect our fiscal 24 revenues to increase more than 18% over revenues in fiscal 23. We expect our fiscal 24 non-gap diluted EPS to grow more than 27% over our non-gap diluted EPS in fiscal 23. This fiscal 24 non-gap diluted EPS guidance excludes potential impairment restructuring in other charges, amortization required intangible assets, the non-cash interest expense, and their associated tax effects, as well as discrete tax and other non-recurring items.

Well again, we're very proud about the certification, we think it's a great product and we.

We do debt turning northern in air cargo.

There is a big revamp going on for new technology.

We are very well poised for it in the international sector, we think that the growth will come even faster.

So we are very excited about it and <unk>.

We go back and look at and the performance of these units compare to the PREPA in existing products that we think that will continue to get a lot of success in this.

Alan Edrick: We currently believe this guidance reflects reasonable estimates. The actual impact on the company's financial results of timing changes on expected revenues, disruptions and increased costs in the supply chain and inflation and interest rates is difficult to predict and could very significantly from the anticipated impact currently reflected in our estimates and guidance. Actual revenues and non-gap earnings per diluted share could also vary from the guidance anticipated above due to other risks and uncertainties discussed in our SEC pilot. We continue to remain focused on the growth of our businesses and proactive management of our cost structure. We believe our efforts will enable OSI to continue providing innovative products and solutions.

Thanks, Deepak and Alan I'll jump back in the queue.

Thank you one moment for our next question.

And our next question.

Comes from the line of Jeff Martin from Roth Capital Partners. Your question. Please.

Thanks, Hi, Deepak Hi, Alan.

I wanted to get a sense in terms of the timing on these two large orders that are going to be ramping up here pretty significantly.

How much is your visibility on timing of proved over the last well since the Q4 call and also wanted to ask in terms of supply chain. If you are able to get components that you need I know youre ordering significantly more than normal.

Just an update there on both those timelines.

Experienced this would be helpful.

Hey, Jeff This is Alan I'll take the first part of that question.

Operator: We would like to take this opportunity to thank the Global OSI Systems team for its continued dedication in supporting our customers and partners, and at this time, we would like to open the call to questions. Certainly, and as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. One moment for our first question.

Our visibility continues to improve as we go month by month on these two large contracts. There are as you would imagine a large contracts often evolving changes.

But we're really excited about it we do anticipate starting to see a real ramp up in revenues on these contracts beginning now in this quarter in Q2.

Josh Nichols: Our first question comes from the line of Josh Nichols from Be Riley. Your question, please. Yeah, thanks for taking my question, and it's really good to see the company with the new Turnkey Security Award here in your way. A couple of questions there. These have been historically high margin awards for the company. One, how long do you expect for this to ramp up in any context you could give us in terms of the potential size of the award? Thanks.

Which is really going to generate some significant revenue growth we believe.

Over the balance of fiscal 'twenty four so we expect that will always be some some changes to the timing and the schedule.

The nature of the Beast in this industry, but the visibility continues to improve and the ramp up is happening as we speak.

Just to add onto this deeper care.

Basically in the supply chain issue, we're handling it well and again I've said in the last conference call too.

Deepak Chopra: Good morning. There's a Deepak here. This is not a very large contract, and it will take us about six, eight months to get it going. And all these turnkey contracts, basically we are making it a point to say this helps the trade between Uruguay and for example North America or Europe. So we continue to look at that these kind of big successes of going forward. Alan, do you want to add something?

We are well positioned compared to other competitors because we have intercompany resources also.

Definitely we cannot ignore the fact that when you ramp up so significantly so fast that there are definitely challenges in the supply chain we.

We are addressing it and as Alan has mentioned that.

We will start seeing big growth from both of these contracts in Q2 almost into Q3 and Q4.

Great and then my other question is with the.

With the unrest in the middle East does that create potential opportunities for you are you seeing increased inquiries from countries in this round.

Stepping up their port and border equipment.

Sebastian capabilities or other areas.

Deepak Chopra: I don't know. I think that was good. And Josh, while we don't talk about margins on specific deals, generally speaking, the margins on our turnkey contracts are nicely north of our overall corporate average. Well, thanks for confirming that.

First I would like to say that we are very saddened and with what's happened there.

We continue to pray for everybody's wellbeing.

I haven't seen any changes on this middle east team.

Deepak Chopra: The company has really been building out its security portfolio. You've been granted approval for ETD with the TSA. Now to how should we think about the timing and opportunities specifically for ETD over the next 12 to 18 months and how that could ramp up? Again, we are very proud about the certification. We think it's a great product. And we do definitely know that in air cargo, there's a big revamp going on for new technology.

Because obviously this is something new but on the Ukraine project and Scott definitely as.

Things mature in that area common sense is that countries around that area are all going to need more security equipment.

We continue to look at opportunities we are working with it at the same time funding is very important.

And as you know that the U S has been in a tough situation with what's happening in Washington as that opens up.

Both for the Middle East challenges and in Ukraine, Russia challenges.

We are very well positioned for any.

Ben to be procured.

Great. Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Larry Solow from CJS Securities. Your question. Please.

Great. Thanks, guys.

I guess a follow up to the last question just on how the contracts are ramping.

Jeff Martin: Thank you one moment for our next question.

Just specifically Alan just in terms of the increase in guidance.

Jeff Martin: And our next question comes from the line of Jeff Martin from Roth Capital Partners. Your question, please. Thanks, Heidi Bakio.

Got it.

These factors are the segments that.

I guess.

The increase.

Alan Edrick: I wanted to get a sense in terms of the timing on these two large orders that are going to be ramping up there pretty significantly. How much has your visibility on timing improved or the last? Well, since the Q4 call and also wanted to ask in terms of supply chain, if you are able to get components that you need, I know you're ordering significantly more than normal, just an update there on both those timelines and experiences would be helpful.

I feel like is that coming from security is that just increased confidence there or what specifically.

Drives you to increase your EPS outlook this year.

Yes, great Great question Larry.

And your hunch is correct the growth and the EPS guidance is coming from our security business you.

You saw in our Q1 that we just reported we saw some nice operating margin expansion, which led to some stronger earnings and as we look out through the balance of the year end and some of the strength in that business.

Alan Edrick: Hey, Jeff, this is Alan. I'll take the first part of that question. Our visibility continues to improve as we go, you know, months by months on these two large contracts. There are, as you would imagine, on large contracts often evolving changes, but we're really excited about it. We do anticipate starting to see a real ramp up in revenues on these contracts beginning now, in this quarter in Q2, which is really going to generate some significant revenue growth we believe over the balance of fiscal 24.

That is really what's driven us to increase the overall EPS guidance, we expect <unk> to continue to perform well in.

In addition to that but a security that's leading to the growth and the EPS guidance.

Okay, and then I don't know if you gave us.

You gave a quad you quantified the book to Bill for security, but.

Do you have that that'd be great, but just also just kind of qualitatively.

Yeah.

Obviously, the world is not getting safer place to opportunities in terms of your Q opportunity funnel of opportunities I think.

Alan Edrick: So we expect that will always be some changes to the timing and the schedule. That's the nature of the beast in this industry, but the visibility continues to improve and the way up is happening as we speak. Just to add on to this deeper clear, basically in the supply chain issue, we're handling it well. And again, I've said in the last conference call too, we are well positioned compared to other competitors because we have intercompany resources also.

Part of that.

Both within vehicle inspection our borders and.

Outside of that in other areas Hello, how are those trending and if you had the book to bill for the quarter.

Yes, so Larry this is Alan the book to Bill in security was $1 one.

Please acquisition as in a record backlog so our highest backlog of all time for our security Division.

Alan Edrick: But definitely, we cannot ignore the fact that when you ramp up so significantly so fast that there are definitely challenges in the supply chain. We are addressing it. And as Alan has mentioned that we will start seeing big growth from both these contracts in Q2, almost into Q3 and Q4. Great.

The visibility is strong the funnel of opportunities is real strong and robust throughout the really throughout the world and the nature of our product lines, maybe Deepak do you want to add to that yeah, I just want to emphasize onto it that the opportunities are growing.

Both Hindi border area.

Air cargo and also in the aviation sector.

That had been on pretty much hold during the Covid time, and as it's coming out right. The traffic is increasing.

Deepak Chopra: And then my other question is with the, you know, with the unrest in the Middle East, does that create potential opportunities for you seeing increased inquiries from countries and surrounding areas for stepping up their port and border equipment inspection capabilities or other areas?

And there is a lot of interest to upgrade to new products and technology bolt in the <unk> in the RTD checkpoint.

And check baggage area and we continue to look at it and we are very optimistic about the funnel.

Deepak Chopra: Well, first, I would like to say that we are very saddened with what's happened there. We continue to pray for everybody's well-being. I haven't seen any changes on this Middle East thing because obviously this is something new, but on the Ukraine project and stuff definitely as things mature in that area, common sense is that countries around that area are all going to need more security equipment. And we continue to look at opportunities.

Okay, and then just lastly, just shifting gears real fast on the health care.

Slower start to the year, then I think you had expected.

I guess two questions.

No again I don't know if you can share with us your thoughts, but maybe I know you had thought.

Segment would be up on both the revenue and an operating profit basis on a full year basis, we still feel like that's attainable and then second part of that question is.

You mentioned sort of a shift to more of a leasing versus upfront sale of the equipment is that like.

Deepak Chopra: We're working with it at the same time. Funding is very important. And as you know that the US has been in a tough situation with what's happening in Washington. As that opens up, both for the Middle East challenges and in your Grand Russia challenges, we are very well positioned for any equipment to be procure.

In its infancy, thats still pretty small today and does that kind of coincide at all with you.

Operator: Thank you. One moment for our next question.

I think you're planning on next generation product coming out soon over the next couple of years.

Those two kind of correlate with one another.

Or any color on that.

Well good question good.

Good analysis you have done.

On the equipment side definitely we were disappointed especially in U S.

With the equipment sale.

I'm showing no the hospitals are going through tough times.

Larry Sullivan: And our next question comes from the line of Larry Sullivan from CTA Securities. Your question, please. Great. Thanks, guys. Just like a follow-up to the last question, just on how the contracts are ramping. Just specifically, Alan, just in terms of the increase in guidance. I know you don't guide by the sector, the segments, but I guess it's already increased. I feel like, is that coming from security? Is that just increased confidence there, or what specifically drives you to increase your EPSO issue?

Two other things that what you asked one we've continued to do the R&D investment to develop a new platform.

Patient monitoring at the same time this new model that is in infancy that we have started the subscription and software models a SaaS model.

Different model, but interestingly Danielle this is catching on there is lot of interest, though it's something in the infancy, new that we're doing.

But just think of it we've been doing this thing and the security side. So now to do that in the health care side, we at least know the building blocks now the question is how to educate our customers and how to be able to prove to them, but I think longer term. We are quite excited about this new model of ongoing revenue, what we call it like the turnkey model.

Larry Sullivan: Yeah, great question, Larry. And your hunch is correct. The growth in the EPS guidance is coming from our security business. You saw in our Q1 that we just reported, we saw some nice operating March expansion, which led to some stronger earnings. And as we look out through the balance of the year and some of the strength in that business, that is really what's driven us to increase the overall EPS guidance. We expect opt-oak to continue to perform well in addition to that, but a security that's leading to the growth in the EPS guidance.

That we have in the security side.

You want to add some share and answer your questions. Larry Yes, those new models are in their infancy, and we think theyre going to be growing nicely over over the coming years.

And our expectation the team's expectation is that the health care Division will grow for the full fiscal year in 'twenty for both on the topline and the bottom line.

Great excellent appreciate the color thanks, guys.

Larry Sullivan: Okay, I don't know if you gave a quantify the book to bill for security, but if you have that, that would be great. But just kind of qualitatively, obviously the world's not getting to be a safer place. But opportunities, in terms of your Q, opportunities, your final opportunities, I think you usually interpret that both within vehicle inspection borders and outside of that and other areas, you know, how those trending and if you had the book to bill for a quarter of a year.

Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone one moment for our next question.

Our next question comes from the line of Christopher Glynn from Oppenheimer. Your question. Please.

Thanks.

A lot's been asked one follow up.

I think you said you expect on healthcare.

Nice improvement starting sequentially really for the balance of the year relative to the first quarter.

It sounded like you were caught off guard a little bit in the first quarter.

Larry Sullivan: Yeah, so Larry, this is Alan. The book to bill and security was 1.1. Position us in a record backlog. So our highest backlog of all time for our security division. The visibility is strong. The funnel of opportunities is real strong and robust throughout the really throughout the world and the nature of our product lines. Maybe deep off you want to add to that? Yeah, just what I'm emphasizing on to it. The opportunities are growing.

Quarter after some fourth quarter strength. So wondering how you would describe the visibility to the expected pick up there.

Well, yes.

We are disappointed in the first quarter, but keep in mind that over the years.

Firstly, it's a single digit growth area, and it's book and ship. It there is not a backlog David so some orders.

Larry Sullivan: Both in the ordered area, air cargo and also in the aviation sector. That had been on pretty much hold during the COVID time and as it's coming out, traffic is increasing. And there is a lot of interest to upgrade to new products in technology, both in the itemizer and the RTT checkpoint and check bagging area. And we continue to look at it and we are very optimistic about the funnel.

Came in in Q4, and Q1, we were expecting some it didn't happen.

So it is a little bit disappointing, but the team feels very much focused onto it that the remainder of the year.

We will get better.

And the innovation that we're doing bolt into software SaaS model and our continued development of a new product portfolio.

That's not going to have what I would call a significant impact in 2020 for it for a longer years focus right now is to be able to capture the accounts that we have and be able to work with the hospitals of alternates do them of making them more efficient pallet.

Larry Sullivan: Okay, and just lastly, just shifting gears real fast on the healthcare. Lower start to the year, then I think you had expected. I guess two questions. And again, I don't know if you can share with us your thoughts, but maybe that I know you have thought that the segment would be up on both the revenue and operating databases on a four-year basis. And then the second part of that question is you mentioned sort of a shift to more of a leasing versus up front sale of the equipment.

Yes, I think that describes it well.

Okay and.

Nice to see positive free cash flow in the first quarter, it's often a challenging seasonal quarter and in particular this year just ahead of significant ramps at security.

Larry Sullivan: Is that like in its impancies? That's still pretty small today. And is that kind of coincide at all with your perhaps you're planning on next generation product coming out soon over the next couple of years? Is that those two kind of quality one another? That'd be great for any column. Well, good question, good analysis you've done. On the equipment side, definitely, we were disappointed, especially in US, with the equipment sale, as you I'm sure know, the hospitals are going to stop tough time.

So wondering if you could give some color on.

What sort of levels range metrics around free cash flow, we should be looking for this year.

Chris This is Alan.

Good question, so while we don't provide free cash flow guidance, we would we.

We would agree with your statement in light of growing our revenue growing our inventory by $80 million to support the large security contracts still generating.

$17 million or so of operating cash flow was what was quite strong in Q1, as we look out there'll be some continued buildup in inventory for these contracts we think worthy.

Larry Sullivan: There are two other things that what you asked, one is we continue to do the R&D investment to develop the new platform of the patient monitoring. At the same time, this new model, that is an infancy that we have started, the subscription and the software model, the SaaS model, it's a little different model. But interestingly, this is catching on. There's a lot of interest though, it's something in the infancy new that we are doing.

As we move beyond this fiscal year, we do expect to generate nice free cash flow this year, but the real strength in the free cash flow.

Larry Sullivan: But just think of it, we've been doing this thing in the security side. So now to do that in the healthcare side, we at least know the building blocks. Now the question is how to educate the customers and how to be able to prove to them. But I think longer term, we are quite excited. About this new model of ongoing revenue, what we call it like the turnkey model that we have in the security side, Alan, you want to add something?

We will begin.

And the subsequent fiscal year is our current expectation.

Okay, and then just one on.

<unk> and manufacturing.

Really looking very sturdy.

Short cycle volatility out there.

From Oems and distribution impacting a lot of names.

Larry Sullivan: Sure, and into your questions, Larry, yes, those new models are in their infancy. And we think they're going to be growing nicely over over the coming years. And in our expectation, you know, the team's expectation is that the healthcare division will grow for the full fiscal year and in 24, both on the top line in the bottom line. Great. Excellent, I appreciate the comment. Thanks. Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. One moment for our next question.

<unk>.

Just curious if you could describe a little bit about what's giving.

That stability, particularly how externals performed in <unk>.

You see in a regular cadence.

Wallet share additions with your global customers.

They try to Derisk our supply chain.

Well again, a very good question, it's a different marketplace.

Now basically in some cases, it's a very predictable customer base.

Deepak Chopra: Our next question comes from the line of Christopher Glenn from Oppenheimer. Your question please. Thanks. A lot's been asked. One follow-up. I think you said you expect on healthcare some nice improvement starting sequence. So, you know, I think it's going to be a little bit more environmentally really for the balance of the year relative to the first quarter. It sounds like you were caught off guard a little bit in the first quarter quarter, you know, after some fourth quarter strength.

We've worked with the Oems and we continue to look at it but they are also going through.

Basically inventory increase stop it.

Longer term.

So it's a continuing evolving matter the thing that really makes us very very good compared to our competitors. One is you have a very broad customer base from aerospace defense to automotive medical consumer name. It we are in all spaces. So as a group all of those areas somewhat weak.

Deepak Chopra: So, what, wondering how you describe the visibility to the expected pick up there. But no, yes, we are disappointed in the first quarter, but keep in mind that over the years, firstly, the single digit growth area and its book and ship. There's not a backlog driven. So some orders came in in Q4 in Q1. We were expecting some. It didn't happen. So, it is a little bit disappointing, but the team feels very much focused on to it that the remainder of the year will get better.

Strong and the second thing that we keep saying it and I've said, it before and I'll say it again.

Our global presence of manufacturing is a big advantage.

And lately you awarded everywhere that there's a lot of talk about alternate to China, and we have the ability both in Asia and in U S and in Europe.

Manufactured products from our customers. So we look at this business as a a very well thought out business predictable business.

Deepak Chopra: And the innovation that we are doing both in the software SaaS model and our continued development on the new product portfolio, that's not going to have what I would call a significant impact in 2024. It's for a longer years. Focus right now is to be able to capture the accounts that we have and be able to work with the hospitals of alternates to them of making them more efficient. Yeah, I think that describes it well.

But like I said this is a focus of the business depending on our customer base.

Alan.

I think that says it well.

Great. Thank you.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to management for any further remarks.

Well, thank you very much and we again want to thank all the employees of the company and all of that all leased.

Customers and everybody else, including the stockholders and not to forget the analysts.

Alan Edrick: Okay, and it was nice to see positive free cash flow in the first quarter. It's often a challenging seasonal quarter and in particular, you know, this year just ahead of significant ramps and security. So, wondering if you could give some color on what sort of levels range metrics around free cash flow. We should be looking for this.

We are very excited about the rest of the year.

Backlog is there to support it and we're looking at a lot of other opportunities and we think that the balance of the year starting in Q2, and Q3 Q4 will be very strong.

Thank you very much Dr <unk>.

Alan Edrick: Chris, this is Alan. Good question. So while we don't provide free cash flow guidance, we would agree with your statement, in light of growing our inventory by 80 million to support the large security contracts, still generating 17 million or so of operating cash flow was quite strong in Q1. As we look out, there will be some continued build-up in inventory for these contracts. We think where the real, real significant free cash flow could be driven is in fiscal 25, fiscal 26 and beyond.

January.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Alan Edrick: I mean, we've historically been a very strong generator of free cash flow. We think that strength will only increase as we move beyond this fiscal year. We do expect to generate a nice free cash flow this year, but the real strength in the free cash flow will begin in the subsequent fiscal years, our current expectation.

Deepak Chopra: Okay, and then just one on Opto and manufacturing, really looking very sturdy, you know, a lot of short cycle volatility out there from OEMs and distribution, impacting a lot of names. And just so curious, if you could describe a little bit about what's giving, you know, that stability, particularly how externals performed. And, you know, if you're seeing a regular cadence of, you know, wallet share additions with your global customers as they try to de-risk supply chain.

Deepak Chopra: Well, again, a very good question. It's a different marketplace. You know, basically, in some cases, it's a very predictable customer base. We worked with the OEMs and we continue to look at it, but they're also going through basically inventory increase, stop it, go longer term. So that it's a continuing evolving matter. The thing that really makes us very, very good compared to our competitors, one is they have a very broad customer base from aerospace defense to automotive medical consumer name it, we're in all spaces.

Deepak Chopra: So as a group, all those areas, some are weak, some are strong. And the second thing that we keep saying it, and I've said it before, and I said it again, our global presence of manufacturing is a big advantage. And lately, you've heard it everywhere that there's a lot of talk about alternate to China. And we have the ability, both in Asia and in US and in Europe to manufacture products for my customers. So we look at this business as a very well thought of business, predictable business. But like I said, this is a focus of the business, depending on a customer base.

Alan Edrick: Alan? I think that says it well. I agree, thank you.

Operator: Thank you.

Operator: This does conclude the question and answer session of today's program.

Deepak Chopra: I'd like to hand the program back to management for any further remarks. Well, thank you very much. And we again want to thank all the employees of the company and all the customers and everybody else, including the stockholders and not to forget the analysts. We are very excited about the rest of the year. Back along is there to support it. And we're looking at a lot of other opportunities. And we think that the balance of the year starting in Q2 into Q3, Q4 will be very strong. Thank you very much. Thank you in January.

Operator: Thank you ladies and gentlemen for your participation in today's conference. This does include the program.

Operator: You may now disconnect.

Operator: Good day.

Q1 2024 OSI Systems Inc Earnings Call

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