Q2 2024 OSI Systems Inc Earnings Call
Okay.
Okay.
Good day, and thank you for standing by what the OSI Systems, Inc. Second 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 one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again.
Please be advised that today's conference is being recorded I would now like turn the conference over to your speaker today, Alan Edric CFO. Please go ahead.
Well. Thank you good morning, and thank you for joining us.
Alan Edric Executive Vice President and CFO of OSI systems, and I'm here today, with Deepak Chopra, OSI as president and CEO.
Deepak Chopra: Welcome to the OSI systems fiscal 'twenty, four second quarter conference call.
Deepak Chopra: We are pleased that you can join us as we review our financial and our operational results.
Deepak Chopra: Earlier today, we issued a press release announcing our 2020 for fiscal year second quarter financial results.
Deepak Chopra: Before we discuss our results however.
Deepak Chopra: Like to remind everyone that today's discussion will include forward looking statements.
Deepak Chopra: 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.
Deepak Chopra: All forward looking statements made on this call are based on currently available information and the company undertakes no obligation to update any forward looking statements based on subsequent events or new information or otherwise.
Deepak Chopra: During today's during today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results for.
Deepak Chopra: For further information regarding non-GAAP measures and comparable GAAP measures of the company's results.
Deepak Chopra: And a quantitative reconciliation of those figures please refer to today's earnings press release.
Deepak Chopra: I will begin with a high level summary of our financial performance for the second quarter of fiscal 'twenty four and then turn the call over to <unk> for a discussion of our business and operational performance.
Deepak Chopra: We will then finish with more detail regarding our financial results and a discussion of our outlook for fiscal year 2024.
Deepak Chopra: We mentioned on the last earnings call that we expected to see accelerated growth beginning in Q2 and that was indeed the case.
Deepak Chopra: Our second quarter financial results were very strong with the security Division again generating double digit revenue growth and significant year over year operating margin expansion.
Deepak Chopra: The Opto division performed solidly while the health care division experienced a challenging quarter.
Deepak Chopra: We anticipate significant overall revenue and earnings growth for the balance of fiscal 'twenty four and we are encouraged by the momentum in the business.
Deepak Chopra: Let's start with a summary of our fiscal 2024, our Q2 results.
Deepak Chopra: First <unk>.
Deepak Chopra: Revenues increased 26% year over year to a Q2 record of $373 million driven by the performance in our security Division, where revenues were up 49% year over year.
Deepak Chopra: Second the strong revenue growth coupled with gross margin expansion led to a record Q2 non-GAAP adjusted earnings per share of $2 21.
Deepak Chopra: Up 86% from Q2 of the prior fiscal year.
Deepak Chopra: Third.
Deepak Chopra: Bookings were solid with a book to Bill of approximately one and we ended the quarter with a backlog of nearly $1 8 billion. This strong backlog provides outstanding visibility for the full fiscal year.
Deepak Chopra: Before diving more deeply into our financial results.
Deepak Chopra: And discussing the fiscal 'twenty four outlook I will turn the call over to Deepak.
Deepak Chopra: Thank you Alan.
Deepak Chopra: And thank you to everyone joining us today.
Deepak Chopra: I'm happy to report.
Record breaking second quarter for fiscal 2024 with revenues, reaching $373 million.
Representing 26% growth year over year, and operating income growing 105% over the same period from last year.
Deepak Chopra: This exceptional performance was driven by relentless execution and security.
Deepak Chopra: Complemented by solid results in the Optoelectronics and manufacturing Division.
Deepak Chopra: Our backlog as Alan mentioned, our opportunity pipeline remains extremely healthy.
Deepak Chopra: Writing confidence for strong performance in the second half of 'twenty four and beyond.
Deepak Chopra: Let's discuss each division's performance starting with security.
Deepak Chopra: The security Division delivered Q2 revenues of $250 million.
Representing 49% growth year over year from last year.
Deepak Chopra: That double digit profitability in the same period.
Deepak Chopra: Adjusted operating margin expanded significantly to 22, 7%, reflecting a favorable mix of higher gross margin sales.
Deepak Chopra: I appreciate it operations and robust market demand.
Deepak Chopra: Bookings were also solid.
Deepak Chopra: Spike the sizable conversion of backlog to revenue in the quarter. The security division's backlog at the end of Q2 was comparable to the start of the fiscal year, given our book to Bill ratio of approximately one point in the first half of fiscal 2024.
Deepak Chopra: Q2 marked the commencement of revenue recognition on a recent major cargo programs announced earlier with Savannah, The Mexican defense agency as well as continued momentum on the cargo program with a large international customer previously announced.
Deepak Chopra: We continue to expand our presence for port and border solutions and secured significant recent new contracts.
Deepak Chopra: Shortly after the quarter end.
Announced F 15 $9 million contract that we received in Q2.
Deepak Chopra: From an EMEA region customer for various cargo and vehicle inspection platforms, including our Eagle series and car audio systems.
Deepak Chopra: The more we are expected to integrate these inspection systems into a national Command center through our proprietary search scan integration platform.
Deepak Chopra: It has been gaining traction with port and border custom agencies worldwide and allows us to differentiate our offering from our competitors.
Deepak Chopra: During the quarter, we also announced a $5 million award.
Deepak Chopra: Our Latin American customer for Port security solutions, including installation and integration support for the Eagle <unk> High energy drive thru cargo and vehicle inspection Z portals high throughput.
Deepak Chopra: And the Vms 500 drive thru radiation monitoring portal.
Deepak Chopra: Both of these awards include maintenance and service elements and highlight the compelling value and versatility of the multiple platforms available in a broad portfolio, creating ample opportunities for recurring revenue going forward.
Deepak Chopra: Our aviation business also had a good quarter as well as airport related activity continued to return to pre pandemic levels.
Deepak Chopra: As a testament to our expansion at airports.
Deepak Chopra: <unk> converted on a couple of significant airport opportunities during Q2, we announced an $18 million contract to enhance and international Airport security infrastructure with advanced screening solutions, including the <unk> 110 Realty Margaret time demography explosive detection.
Deepak Chopra: <unk> for screening and hold baggage meta walk through metal detectors.
And itemize, our buybacks explosive trace detection system for secondary screening of passengers.
Deepak Chopra: We will be providing comprehensive multiyear maintenance service and support as part of these awards.
Deepak Chopra: Also announced another international airport win of a $15 million out of order.
Deepak Chopra: For various checkpoint screening systems, enhancing air passenger safety and threat detection capabilities among.
Deepak Chopra: Among the system provided for this award include the already on 90, <unk> checkpoint screening system already on 920, <unk> Dx dual checkpoint screening systems and Itemizer five X explosive trace detection systems.
Deepak Chopra: Besides the equipment.
Deepak Chopra: As well as recurring maintenance and service revenue in forward years.
Speaker Change: Our turnkey projects continued to do well in Albania, Puerto Rico in Guatemala.
Speaker Change: Yes.
Speaker Change: Excuse me.
Speaker Change: The aviation project for turnkey service that we announced last year.
Speaker Change: In our European Air fare Airport went live in December.
Speaker Change: Great.
Speaker Change: For this airport.
Speaker Change: We manage screening services for the staff.
Speaker Change: Airline grows and white goods at perimeter entry points.
In addition, the planning phase has started for the recently awarded Uruguay or turnkey contracts.
Speaker Change: And we look forward to becoming operational later this calendar year.
Speaker Change: With the numerous supported boarder opportunities in our pipeline that are offered meaningful discussions regarding a turnkey offering even if the initial RFP or tender is for just traditional equipment and service only.
Speaker Change: We're excited to be the only company in the security screening marketplace that could point to a decade long history of proven experience in managing successful turnkey programs of various sizes and scopes worldwide.
Speaker Change: Looking ahead.
Speaker Change: We believe that security division has unprecedented visibility with a strong backlog and pipeline of opportunities.
Speaker Change: Robust growth in <unk> 2024 and beyond years.
Speaker Change: Lets looking at the Optoelectronics Division, which had another solid quarter. The Opto division has been working with certain OEM customers to accommodate their demand forecasts that have involved some short term near term push outs of deliveries.
Deepak Chopra: This C. This is a transitional phase as Oems in competitive markets increased levels to mitigate delays as a result of supply chain disruptions during the pandemic economy.
Deepak Chopra: Concurrently we are also working with multiple Oems to take over new programs as the trim their supplier base and gravitate towards more reliable and versatile suppliers like us.
To that end, we had several notable bookings during the quarter and announced orders valued in aggregate of about $14 million that included a $5 million order to provide electronic assemblies to a leading technology OEM customer and another $5 million for electronic assemblies to our motion control and fluid technology OEM and.
Deepak Chopra: Finally, a $4 million order to supply military grade components for missile systems to a leading defense electronics Oems.
Deepak Chopra: These awards highlight our capability to cater to our customers' base diverse and specialized needs.
Deepak Chopra: Building on a trans started last year we.
Deepak Chopra: We are engaging with several customers that have a China centric supply chains and are looking to shift the focus to other regions like southeast Asia. The U S or even near showed U S to help mitigate disrupt disruptions due to shutdowns and freight transportation. Consequently.
Deepak Chopra: We now have a wholly owned facility.
Deepak Chopra: Just now operational in Mexico that has about 60000 square feet dedicated to manufacturing electronic components and higher level assemblies. We are excited about this endeavor as many customers have indicated a clear desire to source from near shore, especially for finished products that are eventually.
Deepak Chopra: This team for their customers in the U S. Looking ahead, we believe that the Opto division is well positioned for long term success.
Deepak Chopra: And finally.
Deepak Chopra: Let's discuss the healthcare division, where revenues were down approximately 4% compared to the same period in the prior year definitely a disappointment we.
Deepak Chopra: We had anticipated modest growth at certain larger U S patient monitoring orders did not materialize in time. However, overall bookings were solid as the book to Bill ratio was nearly $1 two which is encouraging.
Deepak Chopra: The hospital market continues to be challenged but we had several nice order wins during the quarter and continued to strength our hospital presence.
Deepak Chopra: We announced three orders totaling approximately $12 million, which included a $5 million order for patient monitoring solutions and related accessories for a U S. Based hospital, where we will also provide our advanced Rotman index safe and sound exhibit central station and cure bedside patient monitors.
Deepak Chopra: This order arrived unfortunately close to the end of the quarter and could not be delivered within the quarter, but revenue is expected to commence in Q3.
Deepak Chopra: As I mentioned on the last call.
Deepak Chopra: <unk> labs is working on new innovative offerings to the marketplace, such as leasing and subscription programs to help reduce the burden of capital spending by the hospitals to that end I am happy to announce that space labs has commenced offering remote.
Deepak Chopra: Telling me to be management services to hospitals utilizing the CFM, some digital health platform and mobile App to provide real time patient monitoring services.
Deepak Chopra: We are committed to enhancing patient care and expanding our footprint in the healthcare sector by offering differentiated innovative features like safe and sound patient alarm management and Rod meant predictive analytics.
Deepak Chopra: We continue to significantly invest in developing new products to further strengthen our patient monitoring portfolio, including our next generation platform going forward. We will continue to focus on operational execution and aggressively pursue sales growth in this division that has the highest contribution margin in our company.
Deepak Chopra: Overall.
Deepak Chopra: We are very pleased with the company's fiscal 2024 second quarter performance. We are in a good position for the second half of 'twenty four and have a good visibility into fiscal 2025 and thereafter.
Deepak Chopra: Alan now will talk more in detail about our updated fiscal 2024 financial guidance and then we'll open up to questions.
Alan: Well, thank you Deepak.
Alan: So let's review in greater detail the financial results for our fiscal 'twenty four second quarter again, our fiscal Q2 revenues were up 26% with the second quarter of the prior fiscal year.
Alan: Q2 Security Division revenues were up 49%.
Alan: Largely the result of sales growth of our cargo and vehicle inspection products.
Alan: We also had double digit revenue growth in our aviation and checkpoint products and related services.
Deepak Chopra: Q2 revenues included continued shipments from the $200 million plus cargo contract announced in January 23.
Deepak Chopra: And initial revenues from the $500 million plus cargo contract announced in March 23.
Deepak Chopra: Auto sales were down approximately 1% year over year.
Deepak Chopra: Strong intercompany opto sales to support anticipated security Division growth were partially offset by reduced third party revenues as certain <unk> customers decreased inventory levels or are experiencing program delays, which we anticipate we will continue to impact us for another quarter or so.
Deepak Chopra: The health care Division sales decreased 4% year over year with growth in recurring revenues as a SaaS service supplies and accessories, along with growth in cardiology product revenues.
Deepak Chopra: These increases though were outweighed by a decrease in revenues reported for our largest product family patient monitoring and the challenging hospital Capex environment.
Deepak Chopra: The fiscal 'twenty four Q2 gross margin of 37, 9% was up over 500 basis points from the 32, 5% gross margin in Q2 last year.
Deepak Chopra: While the gross margin expanded in each division. The most notable improvement was seen in the security division, which experienced a favorable mix of sales along with strong operational execution.
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 amongst other factors.
Moving to operating expenses.
Deepak Chopra: We continue to work diligently across each of our divisions to improve efficiency and to prudently manage our SG&A cost structure.
Deepak Chopra: Q2, SG&A expenses were $71 6 million or 19, 2% of sales compared to 18, 3% of sales in Q2 of the prior year.
Deepak Chopra: The year over year increase was driven by a higher compensation costs costs, including incentive compensation linked to our significant sales growth increased professional fees and a higher level of bad debt expense than in the prior year Q2.
Deepak Chopra: We expect to leverage our SG&A for fiscal 'twenty four.
Deepak Chopra: Whereas such expenses are expected to decline as a percentage of sales on a full year basis, implying a lower SG&A run rate in the second half of the 2020 for fiscal year than we reported in Q2.
Deepak Chopra: Research and development expenses in Q2 of fiscal 'twenty, four were $16 4 million or four 4% of sales compared to $14 5 million.
Deepak Chopra: Or four 9% of sales in the prior year quarter.
Deepak Chopra: 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.
Deepak Chopra: We recorded $1 million of restructuring and other charges in Q2 of fiscal 2024 compared to $2 3 million of such charges in Q2 of the prior fiscal year.
Deepak Chopra: Moving to interest and taxes.
Deepak Chopra: Net interest and other expenses in Q2 increased to $6 5 million in fiscal year 'twenty four from $5 2 million in fiscal year 'twenty three primarily due to increased interest rates on a higher level of borrowings.
Deepak Chopra: We executed an interest rate swap during Q1 of fiscal 'twenty three to fix a portion of our floating rate bank debt.
Deepak Chopra: Our reported effective tax rate under GAAP was 22% in Q2 of fiscal 'twenty four compared to 19, 5% in Q2 of fiscal 'twenty three.
Deepak Chopra: In Q2 of fiscal 'twenty, four we recognized a discrete tax benefit of $2 5 million compared to zero point $7 million in Q2 of the last fiscal year.
Deepak Chopra: Excluding the impact of discrete tax items, our normalized effective tax rate in Q2 of fiscal 'twenty four was 25, 7%.
Deepak Chopra: Compared to our normalized effective tax rate of 23% in Q2 last year.
Deepak Chopra: I will now turn to a discussion of our non-GAAP adjusted operating margin.
Deepak Chopra: Overall, our non-GAAP adjusted operating margin in the second quarter of fiscal 'twenty four increased to 15, 5% from 10, 7% in Q2 of fiscal 'twenty three driven by strength in the security Division.
Deepak Chopra: The non-GAAP adjusted operating margin in the security Division expanded to 22, 1% in Q2 of this year from 14, 7% in Q2 of last year.
Deepak Chopra: Primarily due to a favorable sales mix and operational improvements.
Deepak Chopra: The adjusted operating margin in our Opto Division was again solid increase in the 13, 4% in the second quarter of fiscal 2024 from 13, 1% in last year's Q2.
Deepak Chopra: The healthcare division's adjusted operating margin was negligible with the reduction in the division sales.
Deepak Chopra: Moving to cash flow.
Deepak Chopra: As mentioned on past calls, we expected to invest significant amounts in working capital associated with the anticipated strong growth in security.
Deepak Chopra: In Q2.
Cash used in operations was $23 5 million, primarily due to increases in accounts receivable associated with the revenue growth and inventory increases and preparation for program deliveries under the two large security division contracts announced last year.
Deepak Chopra: Capex in the second quarter was $3 5 million, while depreciation and amortization expense was $10 3 million.
Our balance sheet is solid.
Deepak Chopra: With modest net leverage of under one four times and significant capacity for investments acquisitions and stock buybacks.
Aside from $7 5 million of annual required principal payments under our bank term loan the.
Deepak Chopra: The bulk of our debt matures in fiscal 2027.
Deepak Chopra: Finally, turning to guidance.
Deepak Chopra: We are increasing both our fiscal 'twenty for revenues.
Deepak Chopra: And non-GAAP diluted EPS guidance.
Deepak Chopra: We currently expect our fiscal 2020 for revenues to increase more than 19% over revenues in fiscal 'twenty three.
Deepak Chopra: And we anticipate our fiscal 2024, non-GAAP diluted EPS to grow more than 29% over our non-GAAP diluted EPS in fiscal 'twenty three.
Deepak Chopra: This non-GAAP diluted EPS guidance excludes potential impairment restructuring and other charges.
Deepak Chopra: Amortization of acquired intangible assets and their associated tax effects.
Deepak Chopra: As well as discrete tax and other nonrecurring items.
Deepak Chopra: We currently believe this guidance reflects reasonable estimates.
Deepak Chopra: 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.
Deepak Chopra: Actual revenues and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings.
Deepak Chopra: We continue to remain focused on the growth of our businesses and.
Deepak Chopra: And proactive management of our cost structure.
Deepak Chopra: We believe our efforts will enable OSI to continue providing innovative products and solutions.
Deepak Chopra: We'd 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.
We'd like to open the call to questions.
Deepak Chopra: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Deepak Chopra: These standby, while we compile the Q&A roster.
Deepak Chopra: Yes.
Deepak Chopra: Our first question comes from the line of Josh Nichols from B Riley.
Deepak Chopra: Okay.
Josh Nichols: Yes, thanks for taking my questions and great to see such strong results, particularly from the security Division.
Josh Nichols: I think you highlighted on the call but.
<unk> had pretty strong award wins this year as well too.
Year to date, including at $59 million award at the EMEA region.
Deepak Chopra: One fair to assume that's not in backlog because it happened after quarter end and then two are you seeing other opportunities in this region or others with things like the conflict in Israel that are going on that.
Deepak Chopra: Could offer some large contract wins later this calendar year.
Thank you very much this is deepak here.
Deepak Chopra: As I mentioned in my call.
Deepak Chopra: The pipeline insecurity looks very strong to us.
Deepak Chopra: And in basically all regions. The only place that data is a little bit of slow down and everybody is on hold is in U S. Because of what's going on in Washington, but all over the world. The pipeline is very strong and we believe that we are very well poised.
Deepak Chopra: To win some other strong big contracts all over the globe not only just in cargo, but even in aviation.
Deepak Chopra: Thanks, and then just since you touched on the U S I know.
Deepak Chopra: We don't have a budget yet.
Deepak Chopra: But if you're looking at here Theres clearly a lot of focus on the southern border you've had some very nice large award wins there.
Deepak Chopra: Could you talk about some of the opportunity that could come to fruition. Later this year on that broke because theres still some a good amount of availability under the idea iqs or even later and potentially if we look at like a TSA refresh next calendar year or something like that.
Josh Nichols: Again, good question on the southern border.
Josh Nichols: Definitely there is a lot of interest and even India.
Josh Nichols: Temporary budgets that are being talked about it theres lots of interest from both sides of the house for enhancing the border security and we've said that before we are very well poised for it.
Josh Nichols: And then the CVP itself has an <unk> out there, which still has a lot of capacity and we are very much favored as.
Deepak Chopra: As a strong partner in that space on your second half the question aviation.
Deepak Chopra: Definitely.
Deepak Chopra: Airports air traffic is increasing all over the globe and we believe that we are very well poised for it.
Deepak Chopra: Both domestically and internationally.
Deepak Chopra: We've announced some orders internationally that data is out of a growth opportunity.
Deepak Chopra: And definitely there is some uncertainty with the middle East what's going on in the Ukraine.
Deepak Chopra: But we also look at it and we've said it in a couple of times before.
Deepak Chopra: Sooner or later as this things settle down and I keep praying that it does.
Deepak Chopra: All of the areas around that area, where there is conflict all of those countries will need security equipment, and we again are very well poised for it.
Thanks for that last question from me one.
Deepak Chopra: The company has maintained this $1 $8 billion backlog, despite what's been a pretty high conversion through the security with record <unk>.
Deepak Chopra: <unk> revenue.
Deepak Chopra: I presume the visibility into not just this year, but fiscal 'twenty five has to be improving as well with these new awards how much of the backlog do you think youre going to have for.
Josh Nichols: For next year and how much visibility do you have confidence that youre going to be able to grow the top line not just this year, but next year as well too.
Josh Nichols: Well again very good question.
Josh Nichols: As we have said that.
Josh Nichols: Our backlog even after what you just mentioned after a strong Q2 and revenue still is a very strong pipeline seems strong.
Josh Nichols: And we think that will continue into the next years, not just 25% to 26 and beyond but as you know that we already said that historically.
Josh Nichols: It's a lumpy business.
Josh Nichols: Some customers push it out some people wanted even accelerated into it so that can happen. So we don't want to give any specific numbers, but all we're saying is that we are sitting very pretty with a very strong backlog and a very strong pipeline.
Josh Nichols: And the economy is looking good interest rates hopefully will come down traffic is increasing for <unk> has to be moved around and we think that all of that looks like good for the next coming years, Alan you want to add something.
Alan: And I think that sums it up quite nicely strong visibility for the remainder of this year and into coming years. So we think we are quite well positioned.
Deepak Chopra: Great. Thanks Deepak.
Deepak Chopra: Back in the queue.
Deepak Chopra: Thank you.
Deepak Chopra: One moment for our next question.
Deepak Chopra: Our next question comes from the line of Christopher Glynn from Oppenheimer.
Deepak Chopra: Thanks, Thanks, Good morning out there an afternoon for some others.
Deepak Chopra: On healthcare so.
Deepak Chopra: It sounds like a little better second half most likely.
Deepak Chopra: A little seasonal help and.
Deepak Chopra: Perhaps it will still be a little below normalized.
Deepak Chopra: Maybe.
Deepak Chopra: If you can.
Deepak Chopra: Just work with that construct a little bit how do we think about natural market normalization or progression.
Deepak Chopra: Beyond this year the pandemic growth is maybe more digested.
Deepak Chopra: Perhaps that's still an overhang or is the market just.
Deepak Chopra: Become a bit more of a street fight.
Deepak Chopra: Well again, you sort of answered it yourself.
Deepak Chopra: During.
Deepak Chopra: The pandemic and.
Deepak Chopra: <unk> got a little I would call it a great Tom Taylor.
Tailwind and definitely slowing down and if you read it everywhere healthcare sections that challenging section.
Deepak Chopra: Hospitals are having a tough time.
Deepak Chopra: But at the same time, we believe that we have approached.
Deepak Chopra: Some new technology and products that we are looking at it and one of the things that we are very much excited about it as besides selling monitors which is one of our primary business is that the.
Deepak Chopra: Because of the shortness of capital and stuff, we believe the subscription model it looks like a good catch all for medium to small hospitals and we are very proud to announce that we actually have what I said is startup of what we call is a remote telemetry people are sitting in a control room.
Deepak Chopra: Away from the hospital, we got a contract with the hospital and we give services to them and anytime there is vital.
Event, the technician sitting in a control room far away from the hospital.
Deepak Chopra: All up we talked to the technicians, we tell them Hey go look at patient number 14 and that has caught on and it's a subscription model. It's a bang model and without Brockman index also into it we are sort of differentiating ourselves from our customers, but overall it is a challenging business.
Deepak Chopra: And we are spending a lot of money for the last couple of years and we'll continue hopefully with the success of a brand new platform in the coming year.
Deepak Chopra: Okay, great. Thanks, and then.
Deepak Chopra: On the security margins you called out mix, a couple of times and it occurs to me I wanted to ask.
Deepak Chopra: Yeah.
Deepak Chopra: I think different phases of these large projects might have.
Deepak Chopra: Different mixes so.
Deepak Chopra: Should we regard the mix dynamic is kind of optimized in the second quarter relative to what's what's probable in most quarters as you execute these projects.
Alan: Chris This is Alan good question it wasn't due to favorable mix in the second quarter that being said a number of the projects that we have in our backlog and in our pipeline of opportunities.
Alan: Appear to be strong margins as well so while it may not carry the same gross margin profile that we saw in Q2, we still expect it to be very very solid.
Christopher D. Glynn: As we move forward, but it was a very favorable mix in Q2, you're exactly right.
Christopher D. Glynn: Okay, Great and last one.
Alan: No surprise on the slightly negative year to date free cash flow I know, it's timing and obviously you have the projects and overall revenue ramp but.
Alan: Should we assume continued pretty pretty tight next year and more more harvest time in fiscal 'twenty five.
Yes, Chris although we don't really provide cash flow guidance I think directionally. What you are saying is correct.
Alan: We will continue to invest in some working capital associated with these big contracts in the near term and then there is.
Christopher D. Glynn: An opportunity to harvest an awful lot of free cash flow going forward as we have in years in the past. So we're excited about this this is what we like to put our balance sheet to work with.
Christopher D. Glynn: Absolutely. Thank you.
Christopher D. Glynn: Thank you.
Christopher D. Glynn: One moment for our next question.
Christopher D. Glynn: Our next question comes from the line of Larry Solow from CJS Securities.
Christopher D. Glynn: Great. Thank you and good afternoon or good morning.
Christopher D. Glynn: Couple of follow up most of my questions have been answered actually.
Christopher D. Glynn: On the margins I know you don't give specific guidance Alan but.
Christopher D. Glynn: Obviously in the security piece I think it was.
Christopher D. Glynn: 250 points above your previous record high.
Christopher D. Glynn: Im curious.
Christopher D. Glynn: Anything in there that would.
Christopher D. Glynn: Going forward that would make this an unusual number or why can't we kind of.
Christopher D. Glynn: Sort of sit in at least in this low twenties range.
When I look at just.
Christopher D. Glynn: So in the near fact.
The big bump in revenue it looks like the last couple of times you've gone to this.
Christopher D. Glynn: Revenue level, you've also had margin sort of in that.
Christopher D. Glynn: Hi, 19th or over 20, so just trying to.
Christopher D. Glynn: <unk> is there anything that should kind of make those margin not sustainable.
Christopher D. Glynn: Yes, Larry this is Alan good questions and we don't disagree with you again as we.
Alan: As we don't provide guidance on an operating margin level, but what you were talking about.
Alan: And the passing of 19 and low twenties of these type of revenue levels.
Alan: There's every reason to believe that those things are are sustainable there will always be changes associated with the different mix and the like but yes, we do believe that.
Alan: There's every opportunity to sustain and even increase those type of margins over time.
Alan: Okay and in terms of sort of the order count where the funnel I'm not so much orders, but I guess.
Alan: Potential orders.
Deepak Chopra: As you look out obviously.
Josh Nichols: It sounds like.
Josh Nichols: Most areas are still doing really strong, but can you just kind of give us a feel qualitatively where we're at.
Josh Nichols: In terms of.
Josh Nichols: Still seeing a lot of vehicle inspection demand as it is it is it.
Josh Nichols: Cargo inspection of ports, what are sort of the.
Josh Nichols: The bigger drivers if you will.
Deepak Chopra: Excuse me. This is deepak here good question, it's a very broad.
Deepak Chopra: What I said in my mind Might've statement Bolton borders in both security and even in aviation.
Deepak Chopra: All of that area is a lot of demand and a lot of interest not only just for expansion, but also to replace the old technology with the new technology and every customer is more conscious about to make it more efficient and one of the things that we are very proud about it is because of our.
Deepak Chopra: Turnkey multiyear.
Deepak Chopra: Contracts that have been very successful and happy customers. They make a very good reference point.
Deepak Chopra: Selling tool for people for customers that are not even thinking about going to a turnkey solution and best buying equipment, but they look at that and that expands into it. So our presence and we can be very very confidently say, we considered ourselves number one in this space.
Deepak Chopra: But I look at this as a growing business with the economy, there and with people more security conscious and border security everywhere people are more conscious and we have the right equipment.
Deepak Chopra: Now no one area, it's broad all over the world.
Deepak Chopra: Okay, and just switching gears real fast just on auto you mentioned I guess, a couple of things there.
Deepak Chopra: Just a little more color.
Deepak Chopra: What are the.
Deepak Chopra: Flattish quarter, but it sounds like you feel like this is temporary.
Deepak Chopra: You mentioned some program delays I guess were there a couple of specific.
Deepak Chopra: Larger sort of delays that impacted the quarter and what kind of gives you the the.
Deepak Chopra: The encouragement going forward and then secondly, if you could just elaborate a little bit more.
Deepak Chopra: I guess, you said, you're opening up a new facility in Mexico is that the case.
Deepak Chopra: Sure. This is Alan Larry Good question. So on the auto side. There are no large programs to any significant magnitude that were delayed it was just a number of programs from customers who.
Alan Edrick: Probably over bought inventory a little bit during the pandemic times for risk mitigation and and now are right sizing their inventory levels to a more optimum level and maybe some of their own programs.
Alan: Have experienced some delays so it's just a little bit of that kind of stuff that has that led to the relatively flat auto sales and as I said in my remarks as well.
Alan: Continue for another quarter or so.
Alan: Offsetting that to some extent going forward.
Alan: We did open up.
Alan: Our new facility in Mexico.
Alan: We're excited about.
Alan: It's gaining traction and we think it's going to be a big contributor to us in fiscal 'twenty five and beyond.
Alan: And just.
Deepak Chopra: This is deepak here just to add onto it I did say that and we've been saying that are you seeing that in the auto space. This China centric manufacturing customers are very concerned about it they want to go broaden their their portfolio with vendors, who can deliver away from there we are very well placed into it in Indonesia.
Deepak Chopra: Malaysia, and India and now with this Mexico facility open up it gives us a broader reach to go to our OEM customers and get it to a bigger bigger part for them to look at us.
Deepak Chopra: Great. Thanks for all the color I appreciate it guys.
Deepak Chopra: Thank you.
Deepak Chopra: As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Deepak Chopra: Our next question comes from the line of Jeff Martin from Roth.
Deepak Chopra: Yes.
Jeff Martin: Thanks, Good morning, Alan and Deepak.
Jeff Martin: I wanted to touch on.
Jeff Martin: The markets in general.
Jeff Martin: Where do you think you are in terms of.
Jeff Martin: Those being growth market.
Jeff Martin: Or whether you're gaining share how that parses out and then specifically on security you know what percentage of contracts now have sir scan or are they all start scan that seems like a huge differentiator that could become kind of a self fulfilling win rate.
Jeff Martin: As countries need to communicate across their systems and can identify threats that can be helpful.
Jeff Martin: Yes.
Jeff Martin: Prevention.
Deepak Chopra: Jeff This is deepak here, a very broad question.
Deepak Chopra: Definitely I can't say it start scanners.
Deepak Chopra: It is and everything but we believe longer term there.
Deepak Chopra: Two things that differentiate us in the security field from other competitors, we have a very broad product portfolio.
Deepak Chopra: The energy medium energy low energy and we have demonstrated that we can integrate it together with the search scan software and we can do it remote monitoring and stuff like that all of that stuff does help but I won't go back to say that every unit on every contact we have has such scan built into it we do try to.
Deepak Chopra: Push that and we have seen success and I've said that were initially it might not have it but then it results into the next add ons and stuff like that.
Deepak Chopra: We are positioned.
Deepak Chopra: I'm still very confident about it that I can share proudly that leased in the borders and sports security cargo we are very <unk>.
Deepak Chopra: Very confident that we are number one product portfolio very good reputation and we are very well liked by both domestic U S and international customers.
Deepak Chopra: <unk> I don't think so that I can proudly say, we're number one but we are number two and three and we are catching your out but we are also in that space very good in the air cargo space, we have a very broad portfolio and a very large install base and we think that's another growth opportunity for us and even in that space. We have started doing.
Deepak Chopra: What is called remote monitoring for employee screening and stuff like that where we're doing it from a remote control screen.
Deepak Chopra: Great and then if I could just ask one more on a longer term look.
Deepak Chopra: Through more of a longer term lens here could you help us understand where some of the bigger replacement cycles are throughout the world I think the U S youre going to see a passenger screening replacement cycle. Some point in the next several years here, but what other markets there might be replacement cycles upcoming not necessarily in the next 12 months, but maybe in the next three to five years.
Deepak Chopra: Well definitely.
Deepak Chopra: Replacement cycle for the checked baggage is coming in U S. In the next couple of years, there's been some delay.
Deepak Chopra: Passenger screening of more AI more automation is definitely going to happen.
Deepak Chopra: And internationally, there's no one specific area just look at it wherever data is passenger traffic.
Deepak Chopra: You'd think that passenger traffic is going to increase tourism are business related all of them need the space for increasing their security for example, one of the things everybody is talking about it India has a huge potential growth opportunity in expanding and infrastructure, they're making like 2030 40, new airports.
Deepak Chopra: We're very well positioned there. So those are the kind of places, where we think but there's no one specific area. Its all over Mexico, Latin America Middle East Asia, Even Africa everywhere there is growth potential.
Deepak Chopra: Great and then just one more if I could.
Deepak Chopra: Latches onto what you just mentioned are there technologies, where you feel like you've got some internal development to do you do spend a lot on R&D you mentioned AI.
Deepak Chopra: And airport screening.
Deepak Chopra: Just curious if there's technologies out there that you see as a significant opportunity to continue to differentiate.
Deepak Chopra: Well.
Deepak Chopra: Technology Advancement will continue.
Deepak Chopra: In the cargo space, we are very well focused into it we keep spending good money into it we are integrating like for example, search scan and some other automation into the cargo space.
Deepak Chopra: The aviation space are checkpoint RTD for checked baggage is very well received we are putting some AI into it in the passenger screening and what I call the metal gates and stop definitely there is technology out there for higher throughput more technology to do better resolution and stuff.
Deepak Chopra: We are working developing it ourselves plus also partnering with some new technology platforms to integrate our products.
Deepak Chopra: Very helpful. Thank you.
Deepak Chopra: Thank you at this time I would now like to turn the conference back over to Deepak Chopra CEO for closing remarks.
Deepak Chopra: Thank you all for participating in our call and I want to again, thank our employees and our customers and all our stockholders' supporting us it has been.
Deepak Chopra: A great quarter, and we look forward to again talking to you and we feel very good and confident about our strong second half.
Deepak Chopra: And the year beyond thank you.
Deepak Chopra: This concludes today's conference call. Thank you for participating you may now disconnect.
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Uh huh.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: Okay.
Deepak Chopra: Okay.
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Sure.
Deepak Chopra: [music].
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Yes.
[music].
Deepak Chopra: Yes.
Deepak Chopra: Yeah.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: Okay.
Deepak Chopra: Yeah.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: Okay.
Deepak Chopra: Okay.
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Sure.
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: Okay.
Deepak Chopra: Yes.
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Yeah.
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Hum.
Deepak Chopra: [music].
Yes.
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Thanks.
Deepak Chopra: Okay.
Deepak Chopra: Yes.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: Sure.
Deepak Chopra: Yes.
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Okay.
Deepak Chopra: [music].
Deepak Chopra: Good day, and thank you for standing by.
Deepak Chopra: The OSI systems, Inc. Second 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 one on your telephone you will then youre in auto.
Deepak Chopra: <unk> message advising your hand is raised to withdraw your question. Please press star one one again please.
Deepak Chopra: Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Alan Edric CFO. Please go ahead.
Deepak Chopra: Well. Thank you good morning, and thank you for joining us I'm, Alan Edric Executive Vice President and CFO of OSI systems, and I'm here today, with Deepak Chopra, OSI President and CEO.
Alan Edrick: Welcome to the OSI systems fiscal 'twenty, four second quarter conference call.
Alan Edrick: We are pleased that you can join us as we review our financial and our operational results.
Alan Edrick: Earlier today, we issued a press release announcing our 2020 for fiscal year second quarter financial results.
Alan Edrick: 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.
Alan Edrick: All forward looking statements made on this call are based on currently available information and the company undertakes no obligation to update any forward looking statements based on subsequent events or new information or otherwise.
Alan Edrick: During today's during today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results.
Alan Edrick: For further information regarding non-GAAP measures and comparable GAAP measures of the company's results and.
Alan Edrick: And a quantitative reconciliation of those figures please refer to today's earnings press release.
Deepak Chopra: I will begin with a high level summary of our financial performance for the second quarter of fiscal 'twenty four and then turn the call over to Deepak for a discussion of our business and operational performance.
Deepak Chopra: We will then finish with more detail regarding our financial results and a discussion of our outlook for fiscal year 2024.
Deepak Chopra: We mentioned on our last earnings call that we expected to see accelerated growth beginning in Q2 and that was indeed the case, our second quarter financial results were very strong with the security Division again generating double digit revenue growth and significant year over year operating margin expansion.
Deepak Chopra: The Opto division performed solidly while the healthcare division experienced a challenging quarter.
Deepak Chopra: We anticipate significant overall revenue and earnings growth for the balance of fiscal 'twenty four and we are encouraged by the momentum in the business.
Deepak Chopra: Let's start with a summary of our fiscal 2024, our Q2 results.
Deepak Chopra: First <unk>.
Deepak Chopra: Revenues increased 26% year over year to a Q2 record of $373 million driven by the performance in our security Division, where revenues were up 49% year over year.
Jeff Martin: Second the strong revenue growth coupled with gross margin expansion led to a record Q2 non-GAAP adjusted earnings per share of $2 21.
Jeff Martin: Up 86% from Q2 of the prior fiscal year.
Jeff Martin: Third.
Deepak Chopra: Bookings were solid with a book to Bill of approximately one and we ended the quarter with a backlog of nearly $1 8 billion. This strong backlog provides outstanding visibility for the full fiscal year.
Deepak Chopra: Before diving more deeply into our financial results.
Deepak Chopra: And discussing the fiscal 'twenty four outlook I will turn the call over to Deepak.
Deepak Chopra: Thank you Alan.
Deepak Chopra: And thank you to everyone joining us today.
Deepak Chopra: I'm happy to report.
Deepak Chopra: Record breaking second quarter for fiscal 2024 with revenues, reaching $373 million.
Deepak Chopra: Representing 26% growth year over year, and operating income growing 105% over the same period from last year.
Deepak Chopra: This exceptional performance was driven by relentless execution and security.
Deepak Chopra: Complemented by solid results in the Optoelectronics and manufacturing Division.
Deepak Chopra: Our backlog as Alan mentioned, our opportunity pipeline remains extremely healthy.
Deepak Chopra: Writing confidence for strong performance in the second half of 'twenty four and beyond.
Alan Edrick: Let's discuss each division's performance starting with security.
Alan Edrick: The security Division delivered Q2 revenues of $250 million.
Alan Edrick: Representing 49% growth year over year from last year.
Alan Edrick: That double digit profitability in the same period.
Alan Edrick: Adjusted operating margin expanded significantly to 22, 7%, reflecting a favorable mix of higher gross margin sales.
Alan Edrick: I appreciate the operations and robust market demand.
Alan Edrick: Bookings were also solid.
Alan Edrick: Spike the sizable conversion of backlog to revenue in the quarter. The security division's backlog at the end of Q2 was comparable to the start of the fiscal year, given our book to Bill ratio of approximately one <unk> in the first half of fiscal 2024.
Alan Edrick: Q2 marked the commencement of revenue recognition on a recent major cargo programs announced earlier with Savannah, The Mexican defense agency as well as continued momentum on the cargo program with a large international customer previously announced.
Alan Edrick: We continue to expand our presence for port and border solutions and secured significant recent new contracts sure.
Alan Edrick: Shortly after the quarter end, we announced a $59 million contract that we received in Q2.
Alan Edrick: From an EMEA region customer for various cargo and vehicle inspection platforms, including our Eagle series and car audio systems.
Alan Edrick: Are there more.
Alan Edrick: We are expected to integrate these inspection systems into a national command center through our proprietary <unk> integration platform, which has been gaining traction with port and border custom agencies worldwide and allows us to differentiate our offering.
Alan Edrick: From our competitors.
Alan Edrick: During the quarter.
Alan Edrick: Also announced a $5 million award from our Latin American customer for Port security solutions, including installation and integration support for the Eagle <unk> High energy drive thru cargo and vehicle inspection Zip bottles hydro port.
Alan Edrick: And the <unk> 500 drive thru radiation monitoring portal.
Alan Edrick: Both of these awards include maintenance and service elements and highlight the compelling value and versatility of the multiple platforms available in a broad portfolio, creating ample opportunities for recurring revenue going forward.
Alan Edrick: Our aviation business also had a good quarter as well as airport related activity continued to return to pre pandemic levels.
Alan Edrick: As a testament to our expansion at airports, we converted on a couple of significant airport opportunities during Q2, we announced an $18 million contract.
Alan Edrick: To enhance an international airport security infrastructure with advanced screening solutions, including the <unk> 10, real tomography time tomography explosive detection systems for screening and hold baggage.
<unk> walked through metal detectors, and itemize, our buybacks explosive trace detection system for secondary screening of passengers.
Alan Edrick: We will be providing comprehensive multiyear maintenance service and support as part of these awards.
Alan Edrick: We also announced another international airport win of a $15 million order for various jackpot screening systems and.
Alan Edrick: <unk> air passenger safety and threat detection capabilities.
Alan Edrick: Among the system provided for this award included the already on 920, <unk> checkpoint screening system already on 920, <unk> Dx dual wheel jackpot screening systems and itemize, our five X explosive trace detection systems.
Alan Edrick: Besides the equipment as well as recurring maintenance and service revenue in forward years.
Alan Edrick: Our turnkey projects continued to do well in Albania, Puerto Rico and Guatemala.
Alan Edrick: Yes.
Alan Edrick: Excuse me.
Alan Edrick: The aviation project for turnkey service that we announced last year.
Alan Edrick: In our European Airfare Airport went live in December.
Alan Edrick: Great.
Alan Edrick: For this airport.
Alan Edrick: We manage screening services for the staff.
Alan Edrick: Airline grows and write code that parameter entry points.
Alan Edrick: In addition, the planning phase has started for the recently awarded Uruguay.
Alan Edrick: Turnkey contract.
Alan Edrick: And we look forward to becoming operational later this calendar year.
Alan Edrick: With the numerous port and border opportunities in our pipeline.
Deepak Chopra: <unk> offers meaningful discussions regarding a turnkey offering even if the initial RFP or tender is for just traditional equipment and service only.
Deepak Chopra: We are excited to be the only company in the security screening marketplace.
Deepak Chopra: That point to a decade long history of proven experience in managing successful turnkey programs of various sizes and scopes worldwide.
Deepak Chopra: Looking ahead.
Deepak Chopra: We believe that security division has unprecedented visibility with a strong backlog and pipeline of opportunities.
Deepak Chopra: Robust growth in <unk> 24 and beyond years.
Deepak Chopra: Lets looking at the Optoelectronics Division, which had another solid quarter. The Opto division has been working with certain OEM customers to accommodate their demand forecasts that have involved some short term near term push outs of deliveries.
Deepak Chopra: This see this as a transitional phase as Oems in competitive markets increased levels to mitigate delays as a result of supply chain disruptions during the pandemic economy.
Deepak Chopra: Currently we are also working with multiple Oems to take over new programs as they trimmed their supplier base and gravitate towards more reliable and versatile suppliers like us.
Deepak Chopra: To that end, we had several notable bookings during the quarter and announced orders valued in aggregate of about $14 million that included a $5 million order to provide electronic assemblies to a leading technology OEM customer and another $5 million for electronic assemblies to our motion control and fluid technology Oems and <unk>.
Deepak Chopra: Finally, a $4 million order to supply military grade components for missile systems to a leading defense electronics OEM deals.
Deepak Chopra: These awards highlight our capability to cater to our customers' base diverse and specialized needs.
Deepak Chopra: Building on a trend started last year, we are engaging with several customers that have a China centric supply chains and are looking to shift the focus to other regions like southeast Asia. The U S or even near showed U S to help mitigate disrupt disruptions due to shutdowns and freight transportation.
Deepak Chopra: Consequently.
Deepak Chopra: We now have a wholly owned facility.
Deepak Chopra: Just now operational in Mexico that has about 60000 square feet dedicated to manufacturing electronic components and higher level assemblies.
We are excited about this endeavor as many customers have indicated a clear desire to source from near shore, especially for finished products that are eventually destined for their customers in the U S. Looking ahead, we believe that the Opto division is well positioned for long term success.
Deepak Chopra: And finally.
Deepak Chopra: Let's discuss the healthcare division, where revenues were down approximately 4% compared to the same period in the prior year definitely a disappointment we.
Deepak Chopra: We had anticipated modest growth with certain larger U S patient monitoring orders did not materialize in time, however, overall.
Deepak Chopra: Overall bookings were solid as the book to Bill ratio was nearly one two which is encouraging.
Jeff Martin: The hospital market continues to be challenged but we had several nice order wins during the quarter and continued to strength. Our hospital presence, we announced three orders totaling approximately $12 million, which included a $5 million order for patient monitoring solutions and related accessories.
Jeff Martin: U S bed hospital, where we will also provide our advanced Rotman index safe and sound exhibit central station and cure bedside patient monitors.
Jeff Martin: This order arrived unfortunately close to the end of the quarter and could not be delivered within the quarter, but revenue is expected to commence in Q3.
Jeff Martin: As I mentioned on the last call space.
Jeff Martin: Space Labs is working on new innovative offerings to the marketplace, such as leasing and subscription programs.
Jeff Martin: To help reduce the burden of capital spending by the hospitals to that end.
Jeff Martin: Im happy to announce that space labs has commenced offering remote telemetry management services to hospitals utilizing the CFM, some digital health platform and mobile App to provide real time patient monitoring services we.
Jeff Martin: We are committed to enhancing patient care and expanding our footprint in the healthcare sector by offering differentiated innovative features like safe and sound patient alarm management and Rod meant predictive health analytics.
Jeff Martin: We continue to significantly invest in developing new products to further strengthen our patient monitoring portfolio and.
Jeff Martin: Including our next generation platform going forward, we will continue to focus on operational execution and aggressively pursue sales growth in this division that has the highest contribution margin in our company.
Jeff Martin: Overall.
Jeff Martin: We are very pleased with the company's fiscal 2024 second quarter performance. We are in a good position for the second half of 'twenty four and have a good visibility into fiscal 2025 and thereafter.
Alan Edrick: Alan now will talk more in detail about our updated fiscal 2024 financial guidance and then we'll open up to questions.
Alan Edrick: Well, thank you Deepak.
Alan Edrick: So let's review in greater detail the financial results for our fiscal 'twenty four second quarter again, our fiscal Q2 revenues were up 26% with the second quarter of the prior fiscal year.
Alan Edrick: Q2 Security Division revenues were up 49% largely the result of sales growth of our cargo and vehicle inspection products.
Alan Edrick: We also had double digit revenue growth in our aviation and checkpoint products and related services.
Deepak Chopra: Q2 revenues included continued shipments from the $200 million plus cargo contract announced in January 23.
Deepak Chopra: And initial revenues from the $500 million plus cargo contract announced in March 23.
Auto sales were down approximately 1% year over year <unk>.
Deepak Chopra: Strong intercompany opto sales to support anticipated security Division growth were partially offset by reduced third party revenues as certain <unk> customers decreased inventory levels or are experiencing program delays, which we anticipate we will continue to impact us for another quarter or so.
Deepak Chopra: The healthcare division sales decreased 4% year over year with growth in recurring revenues as a SaaS service supplies and accessories, along with growth in cardiology product revenues.
Deepak Chopra: These increases though.
Deepak Chopra: Weighed by a decrease in revenues reported for our largest product family patient monitoring and the challenging hospital Capex environment.
Deepak Chopra: The fiscal 'twenty four Q2 gross margin of 37, 9% was up over 500 basis points from the 32, 5% gross margin in Q2 last year.
Deepak Chopra: While the gross margin expanded in each division.
Deepak Chopra: Most notable improvement was seen in the security division, which experienced a favorable mix of sales along with strong operational execution.
Deepak Chopra: 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 amongst other factors.
Deepak Chopra: Moving to operating expenses.
Deepak Chopra: We continue to work diligently across each of our divisions to improve efficiency and to prudently manage our SG&A cost structure.
Deepak Chopra: Q2, SG&A expenses were $71 6 million or 19, 2% of sales compared to 18, 3% of sales in Q2 of the prior year.
Jeff Martin: The year over year increase was driven by a higher compensation costs costs, including incentive compensation linked to our significant sales growth increased professional fees and a higher level of bad debt expense than in the prior year Q2.
We expect to leverage our SG&A for fiscal 'twenty four.
Jeff Martin: Whereas such expenses are expected to decline as a percentage of sales on a full year basis, implying a lower SG&A run rate in the second half of 2020 for fiscal year than we reported in Q2.
Jeff Martin: Research and development expenses in Q2 of fiscal 'twenty, four were $16 4 million or four 4% of sales compared to $14 5 million or.
Jeff Martin: Or four 9% of sales in the prior year quarter.
Jeff Martin: We continue to dedicate considerable resources 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.
Jeff Martin: We recorded $1 million of restructuring and other charges in Q2 of fiscal 2024 compared to $2 3 million of such charges in Q2 of the prior fiscal year.
Jeff Martin: Moving to interest and taxes.
Jeff Martin: Net interest and other expenses in Q2 increased to $6 5 million in fiscal year 'twenty four from $5 2 million in fiscal year 'twenty three primarily due to increased interest rates on a higher level of borrowings.
Jeff Martin: We executed an interest rate swap during Q1 of fiscal 'twenty three to fix a portion of our floating rate bank debt.
Jeff Martin: Our reported effective tax rate under GAAP was 22% in Q2 of fiscal 'twenty four compared to 19, 5% in Q2 of fiscal 'twenty three.
Deepak Chopra: In Q2 of fiscal 'twenty, four we recognized a discrete tax benefit of $2 5 million compared to zero point $7 million in Q2 of the last fiscal year.
Deepak Chopra: Excluding the impact of discrete tax items, our normalized effective tax rate in Q2 of fiscal 'twenty four was 25, 7%.
Jeff Martin: Compared to our normalized effective tax rate of 23% in Q2 last year.
Jeff Martin: I will now turn to a discussion of our non-GAAP adjusted operating margin.
Jeff Martin: Overall, our non-GAAP adjusted operating margin in the second quarter of fiscal 'twenty four increased to 15, 5% from 10, 7% in Q2 of fiscal 'twenty three driven by strength in the security Division.
Deepak Chopra: The non-GAAP adjusted operating margin in the security Division expanded at 22, 1% in Q2 of this year from 14, 7% in Q2 of last year, primarily due to a favorable sales mix and operational improvements.
Deepak Chopra: The adjusted operating margin in our Opto Division was again solid increase in the 13, 4% in the second quarter of fiscal 2024 from 13, 1% in last year's Q2.
Deepak Chopra: The healthcare division's adjusted operating margin was negligible with the reduction in the division sales.
Deepak Chopra: Moving to cash flow.
Jeff Martin: As mentioned on past calls, we expected to invest significant amounts in working capital associated with the anticipated strong growth in security.
Jeff Martin: In Q2.
Jeff Martin: Cash used in operations was $23 5 million, primarily due to increases in accounts receivable associated with the revenue growth and inventory increases and preparation for program deliveries under the two large security division contracts announced last year.
Jeff Martin: Capex in the second quarter was $3 5 million, while depreciation and amortization expense was $10 3 million.
Jeff Martin: Our balance sheet is solid.
Jeff Martin: With modest net leverage of under one four times and significant capacity for investments acquisitions and stock buybacks.
Jeff Martin: Aside from $7 5 million of annual required principal payments under our bank term loan the.
Jeff Martin: The bulk of our debt matures in fiscal 2027.
Jeff Martin: Finally, turning to guidance.
Jeff Martin: We are increasing both our fiscal 'twenty for revenues.
Alan Edrick: And non-GAAP diluted EPS guidance.
Alan Edrick: We currently expect our fiscal 2020 for revenues to increase more than 19% over revenues in fiscal 'twenty three.
Alan Edrick: And we anticipate our fiscal 2024, non-GAAP diluted EPS to grow more than 29% over our non-GAAP diluted EPS in fiscal 'twenty three.
Alan Edrick: This non-GAAP diluted EPS guidance excludes potential impairment restructuring and other charges.
Alan Edrick: Amortization of acquired intangible assets and their associated tax effects.
Alan Edrick: As well as discrete tax and other nonrecurring items.
Alan Edrick: We currently believe this guidance reflects reasonable estimates.
Alan Edrick: 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.
Actual revenues and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings.
We continue to remain focused on the growth of our businesses and.
Alan Edrick: And proactive management of our cost structure.
Alan Edrick: We believe our efforts will enable OSI to continue providing innovative products and solutions.
Alan Edrick: We'd 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.
Alan Edrick: We'd like to open the call to questions.
Alan Edrick: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Alan Edrick: These standby, while we compile the Q&A roster.
Alan Edrick: Yes.
Our first question comes from the line of Josh Nichols from B Riley.
Alan Edrick: Okay.
Josh Nichols: Yes, thanks for taking my questions and great to see such strong results, particularly from the security Division.
Josh Nichols: I think you highlighted on the call, but <unk> had pretty strong award wins this year as well too.
Josh Nichols: Year to date included in that $59 million award at the EMEA region.
Josh Nichols: One fair to assume that is not in backlog because it happened after quarter end and then two are you seeing other opportunities in this region or others with things like the conflict in Israel that are going on that.
Josh Nichols: Could offer some large contract wins later this calendar year.
Deepak Chopra: Thank you very much. This is deepak here as I mentioned in my call or the pipeline in security looks very strong to us.
Deepak Chopra: And in basically all regions. The only place that data is a little bit of slowdown and everybody on hold is in U S. Because of what's going on in Washington, but all over the world. The pipeline is very strong and we believe that we are very well poised.
Deepak Chopra: To win some other strong big contracts all over the globe not only just in cargo, but even in aviation.
Deepak Chopra: Thanks, and then just since you touched on the U S I know.
Deepak Chopra: We don't have a budget yet.
But if you're looking at here Theres clearly a lot of focus on the southern border you've had some very nice large award wins there.
Deepak Chopra: Could you talk about some of the opportunity that could come to fruition. Later this year on that broke because theres still some a good amount of availability under the IDI cues or even later and potentially if we look at like a TSA refresh next calendar year or something like that.
Deepak Chopra: Again, good question on the southern border.
Deepak Chopra: Definitely there is a lot of interest and even India.
Deepak Chopra: I'm pretty budgets that are being talked about it theres lots of interest from both sides of the house for enhancing the border security.
And we've said that before we are very well poised for it.
Deepak Chopra: The CVP itself has an <unk> out there, which still has a lot of capacity and we are very much favored as a strong partner in that space on your second half of the question aviation are definitely the airports air traffic is increasing all over the globe and we.
Deepak Chopra: We believe that we are very well poised for it.
Deepak Chopra: Both domestically and internationally and.
Deepak Chopra: And we've announced some orders internationally that data is out of growth opportunity and definitely there is some uncertainty with the middle east what's going on in the Ukraine.
Deepak Chopra: But we also look at it and we've said it in a couple of times before sooner or later as this things settle down and I keep praying that it does all of the areas around that area, where there is conflict all of those countries will need security equipment, and we again are very well poised for it.
Deepak Chopra: Thanks last question for me one.
Deepak Chopra: Impressive that the company has maintained this one $8 billion backlog, despite what's been a pretty high conversion through the security with record <unk> revenue.
Deepak Chopra: I presume the visibility into not just this year, but fiscal 'twenty five has to be improving as well with these new awards like how much of the backlog do you think youre going to have.
Deepak Chopra: For next year and how much visibility do you have confidence that youre going to be able to grow the top line not just this year, but next year as well too.
Deepak Chopra: Well again very good question.
Deepak Chopra: As we have said that.
Deepak Chopra: Our backlog even after what you just mentioned after a strong Q2 and revenue are still has very strong pipeline seems strong.
Deepak Chopra: And we think that will continue into the next years, not just 25% to 26 and beyond but as you would know that we already said that historically.
Deepak Chopra: It's a lumpy business.
Deepak Chopra: Some customers push it out some people want it even accelerated into it so that can happen. So we don't want to give any specific numbers, but all we're saying is that we are sitting very pretty with a very strong backlog and a very strong pipeline.
Deepak Chopra: And the economy is looking good interest rates hopefully will come down traffic is increasing for <unk> has to be moved around and we think that.
Alan Edrick: All of that looks like good for the next coming years, Alan you want to add something.
Alan Edrick: I think that sums it up quite nicely strong visibility for the remainder of this year and into coming years. So we think we're quite well positioned.
Alan Edrick: Great. Thanks, deep pocket, our pop back in the queue.
Deepak Chopra: Thank you.
One moment for our next question.
Deepak Chopra: Our next question comes from the line of Christopher Glynn from Oppenheimer.
Deepak Chopra: Yes.
Deepak Chopra: Thanks, Thanks, good morning out there and afternoon for some others.
Deepak Chopra: Question on healthcare, so it sounds like a little better second half most likely a little seasonal help right.
Deepak Chopra: Perhaps it will still be a little below normalized.
Deepak Chopra: Maybe if you can.
Deepak Chopra: Just work with that construct a little bit how do we think about natural market normalization or progression.
Deepak Chopra: Beyond this year the pandemic growth is maybe more digested.
Deepak Chopra: Perhaps that's still an overhang or is the market just become a bit more of a street fight.
Deepak Chopra: Well again, you sort of answered it yourself.
Deepak Chopra: Yes.
Deepak Chopra: The pandemic.
Deepak Chopra: And we got a little I would call it a great day.
Deepak Chopra: Aylwin.
Deepak Chopra: And definitely slowing down and if you read it everywhere healthcare sections of challenging section.
Deepak Chopra: Hospitals are having a tough time.
Deepak Chopra: But at the same time, we believe that we have approached.
Deepak Chopra: Some new technology and products that we are looking at it and one of the things that we are very much excited about it as besides selling monitors which is one of our primary business is that the.
Deepak Chopra: Because of the shortness of capital and stuff, we believe the subscription model it looks like a good catch all for medium to small hospitals and we are very proud to announce that we actually have what I said a startup of what we call is a remote elementary people are sitting in a control room.
Deepak Chopra: Away from the hospital, we got a contract with the hospital and we give services to them and anytime there is a vital sign in.
Alan Edrick: Event, the technician sitting in a control room far away from the hospital.
Alan Edrick: All up we talk to the technician, we tell them Hey go look at patient number 14 and that has caught on and it's a subscription model. It's a bang model and without Brockman index also intuit, where sort of differentiating ourselves from our customers.
Alan Edrick: But overall it is a challenging business and.
Alan Edrick: And we are spending a lot of money for the last couple of years and we'll continue hopefully with the success of a brand new platform in the coming year.
Alan Edrick: Okay, great. Thanks, and then on.
Alan Edrick: The security margins you called out mix, a couple of times and it occurs to me I wanted to ask.
Alan Edrick: Yes.
Alan Edrick: Different phases of these large projects might have different mixes.
Alan Edrick: Should we regard the mix dynamic is kind of optimized in the second quarter relative to what's what's probable in most quarters as you execute these projects.
Alan Edrick: Chris This is Alan good question it wasn't due to favorable mix in the second quarter that being said a number of the projects that we have in our backlog and in our pipeline of opportunities.
Christopher D. Glynn: Year to be strong margins as well so while it may not carry the same gross margin profile that we saw in Q2, we still expect it to be very very solid as we move forward, but it was a very favorable mix in Q2, you're exactly right.
Alan Edrick: Okay, Great and last one.
Alan Edrick: No surprise on the slightly negative year to date free cash flow I know, it's timing and obviously you have the projects and overall revenue ramp.
Alan Edrick: Should we assume continued pretty pretty tight next year and more more harvest time in fiscal 'twenty five.
Alan Edrick: Yes, Chris although we don't really provide cash flow guidance I think directionally, what you're saying is correct.
Alan Edrick: We will continue to invest in some working capital associated with these big contracts in the near term and then there is.
Christopher D. Glynn: An opportunity to harvest an awful lot of free cash flow going forward as we have in years in the past. So we're excited about this this is what we like to put our balance sheet to work with.
Christopher D. Glynn: Absolutely. Thank you.
Christopher D. Glynn: Thank you.
Christopher D. Glynn: One moment for our next question.
Christopher D. Glynn: Our next question comes from the line of Larry Solow from CJS Securities.
Christopher D. Glynn: Great. Thank you and good afternoon good morning.
Christopher D. Glynn: Couple of follow ups most of my questions been answered actually.
Christopher D. Glynn: On the margins I know you don't give specific guidance Alan but.
Christopher D. Glynn: Obviously in the security piece I think it was.
Christopher D. Glynn: Good 250 points above your previous record high.
Christopher D. Glynn: Curious.
Anything in there that would.
Christopher D. Glynn: Going forward that would make this an unusual number or why can't we kind of.
Sort of sit in at least in this low twenties range.
Christopher D. Glynn: As I look at just the.
Christopher D. Glynn: So in the near fact.
Christopher D. Glynn: The big bump in revenue it looks like the last couple of times you've gone to this.
Christopher D. Glynn: Revenue level, you've also had margin sort of in that.
Christopher D. Glynn: 19 of our over 20, so just trying to.
Christopher D. Glynn: Is there anything that should kind of make those margin not sustainable.
Alan Edrick: Yes, Larry this is Alan good good questions and we don't disagree with you again as we.
Alan Edrick: As we don't provide guidance on an operating margin level, but what you were talking about.
Alan Edrick: And the passing of 19 and low twenties of these type of revenue levels.
Alan Edrick: There is every reason to believe that those things are are sustainable there will always be changes associated with the different mix and the like but yes, we do believe that.
Alan Edrick: There's every opportunity to sustain and even increase those type of margins overtime.
Alan Edrick: Okay and in terms of sort of the order count where the all the funnel I'm not so much orders, but I guess.
Alan Edrick: Potential orders.
Alan Edrick: As you look out obviously.
Alan Edrick: It sounds like.
Alan Edrick: Most areas are still doing really strong, but can you just kind of give us a feel qualitatively where we're at.
Alan Edrick: In terms of.
Alan Edrick: Still seeing a lot of vehicle inspection demand as it is it is it.
Alan Edrick: Cargo inspection airports, what are sort of the the bigger the bigger drivers if you will.
Deepak Chopra: Excuse me. This is deepak here good question, it's a very broad.
Deepak Chopra: What I said in my mind My statement Bolton borders in both security and even in aviation.
Deepak Chopra: All of that area is a lot of demand and a lot of interest not only just for expansion, but also to replace the old technology with the new technology and every customer is more conscious about to make it more efficient and one of the things that we are very proud about it is because of our.
Deepak Chopra: Turnkey multiyear.
Deepak Chopra: Contracts that have been very successful and happy customers. They make a very good reference point.
Deepak Chopra: Selling tool for people for customers that are not even thinking about going to a turnkey solution and best buying equipment, but they look at that and it expands into it so our presence and we can be very very confidently say, we considered ourselves number one in this space.
Deepak Chopra: But I look at this as a growing business with the economy, there and with people more security conscious and border security everywhere people are more conscious and we have the right equipment.
Deepak Chopra: No one area, it's broad all over the world.
Deepak Chopra: Okay, and just switching gears real fast just on auto you mentioned I guess, a couple of things there.
Deepak Chopra: Just a little more color.
Deepak Chopra: What are the.
Deepak Chopra: Flattish quarter, but it sounds like you feel like this is temporary.
Deepak Chopra: Were there specific.
Deepak Chopra: You mentioned some program delays I guess were there a couple of specific kind of larger sort of delays that impacted the quarter and what kind of gives you the.
Deepak Chopra: The encouragement going forward and then secondly, if you could just elaborate a little bit more.
Deepak Chopra: I guess you said you are opening up a new facility in Mexico is that the case.
Deepak Chopra: Sure.
Alan Edrick: Alan Larry Good question. So on the auto side, there are no large programs to any significant magnitude that were delayed it was just a number of programs from customers who.
Alan: Probably over bought inventory a little bit during the pandemic times for risk mitigation and and now are right sizing their inventory levels to a more optimum level and maybe some of their own programs.
Alan: <unk> experienced some delays so it's just a little bit of that kind of stuff that has that led to the relatively flat auto sales and as I said in my remarks, as well that could.
Alan: Continue for another quarter or so.
Alan: Offsetting that to some extent going forward.
Alan: We did open up.
Our new facility in Mexico.
Alan: That we're excited about it.
Alan: It's gaining traction and we think it's going to be a big contributor to us in fiscal 'twenty five and beyond.
Alan: And yes, yes.
Deepak Chopra: Yes, Deepak here just to add onto it I did say that and we've been saying that and you're seeing that in the auto space.
Deepak Chopra: China centric manufacturing customers are very concerned about it they wanted to go broadened their their portfolio with vendors, who can deliver away from there we are very well placed into it and Minden, Louisiana in Malaysia, and India and now with this Mexico facility open up it gives us a broader reach to go to our OEM customers.
Deepak Chopra: And get it to a bigger bigger part for them to look at us.
Deepak Chopra: Great. Thanks for all the color I appreciate it guys.
Deepak Chopra: Thank you.
Deepak Chopra: As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Deepak Chopra: Our next question comes from the line of Jeff Martin from Roth.
Deepak Chopra: Tom.
Deepak Chopra: Thanks, Good morning Deepak.
Deepak Chopra: I wanted to touch on that.
Deepak Chopra: The markets in general.
Deepak Chopra: Where do you think you are in terms of.
Those being growth markets.
Deepak Chopra: Or whether you're gaining share how that parses out and then specifically on security you know what percentage of contracts now have sir scan or are they all start scan that seems like a huge differentiator that could become kind of a self fulfilling win rate.
Deepak Chopra: As countries need to communicate across their systems and can identify threats that can be helpful.
Deepak Chopra: For for prevention.
Deepak Chopra: Jeff This is deepak here.
Deepak Chopra: A very broad question.
Definitely I can't say it start scanners is and everything but we believe longer term.
Deepak Chopra: The two things that differentiate us in the security field from other competitors, we have a very broad product portfolio high energy medium energy low energy and we have demonstrated that we can integrate it together with the search scan software and we can do it remote monitoring and stuff like that all that stuff does.
Deepak Chopra: Helped but I won't go back to say that every unit on every contract. We have had such scan built into it we do try to push that and we have seen success and I've said that were initially it might not have it but then it results into the next add ons and stuff like that.
Deepak Chopra: Regarding our position.
Deepak Chopra: I'm still very confident about it that I can share proudly that leasing the borders and ports security cargo. We are very very confident that we are number one product portfolio very good reputation and we are very well liked by both domestic U S and international customers. The aviation I don't think so that I can.
Deepak Chopra: Proudly say, we're number one but number two and three and we are catching ground, but we are also in that space very good in the air cargo space, we have a very broad portfolio and a very large installed base and we think that's another growth opportunity for us and even in that space. We have started doing what is called remote.
Deepak Chopra: Monitoring for employee screening and stuff like that where we're doing it from a remote control screen.
Great and then if I could just ask one more on a longer term look.
Through more of a longer term rents here could you help us understand where some of the bigger replacement cycles are throughout the world I think the U S youre going to see a passenger screening replacement cycle. Some point in the next several years here, but what other markets that might be replacement cycles upcoming not necessarily in the next 12 months, but maybe in the next three to five years.
Deepak Chopra: Well definitely.
Deepak Chopra: Replacement cycle for the checked baggage is coming in U S. In the next couple of years, there's been some delay.
Deepak Chopra: Passenger screening of more AI more automation is definitely going to happen.
Deepak Chopra: And internationally, there's not one specific area just look at it wherever data is passenger traffic wherever you think that passenger traffic is going to increase tourism are business related all of them need the space for increasing their security for example, one of the things everybody is talking about it India has a huge potential growth.
Deepak Chopra: Opportunity theyre, expanding and infrastructure, they're making like 2030 40, new airports.
Deepak Chopra: We are very well positioned there. So those are the kind of places where we think but there is no one specific area. Its all over Mexico, Latin America Middle East Asia, Even Africa everywhere there is growth potential.
Deepak Chopra: Great and then just one more if I could.
Deepak Chopra: Latches onto what you just mentioned are there technologies, where you feel like you've got some internal development to do you do spend a lot on R&D you mentioned AI.
Deepak Chopra: And airport screening.
Deepak Chopra: Curious if there's technologies out there that you see as a significant opportunity to continue to differentiate.
Deepak Chopra: Well that technology advancement will continue.
Deepak Chopra: But in the cargo space.
Deepak Chopra: We are very well focused into it we keep spending good money into it we are integrating like for example, search scan and some other automation into the cargo space in the aviation space are checkpoint RTD for checked baggage is very well received we are putting some AI into it in the passenger screening and.
I called the metal gates and stop definitely there is technology out there for higher throughput more technology to do better resolution and stuff. We are working developing it ourselves plus also partnering with some new technology platforms to integrate our products.
Deepak Chopra: Very helpful. Thank you.
Deepak Chopra: Thank you at this time I would now like to turn the conference back over to Deepak Chopra CEO for closing remarks.
Deepak Chopra: Thank you all for participating in our call and I want to again, thank our employees and our customers and all our stockholders' supporting us it's been a great quarter and we look forward to again talking to you and we feel very good and confident about our strong second half and the year beyond.
Deepak Chopra: Thank you.
Deepak Chopra: This concludes today's conference call. Thank you for participating you may now disconnect.