Q3 2024 OSI Systems Inc Earnings Call

April 25, 2024

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Operator: Good day, and thank you for standing by. Welcome to the OSI Systems Inc. third quarter 2024 conference call. At this time, all participants are in a listen only mode.

Speaker Change: Good day and thank you for standing by welcome to the OSI Systems, Inc. Third 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 will then hear and automate.

Operator: 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 11 on your telephone. You will then hear an automated message advising you that your hand is raised.

Good message advising you your hand is raised to withdraw your question. Please press star. One again. Please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today, Alan Edric Chief Finance.

Operator: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Edrick, Chief Financial Officer. Please go ahead.

Alan I. Edrick: Chief Financial Officer. Please go ahead.

Alan I. Edrick: Good morning, and thank you for joining us. 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 24 3rd 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 third quarter financial results. Before we discuss the 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 1995 with respect to such forward-looking statements.

Alan I. Edrick: Hi, good morning, and thank you for joining us I'm, Alan address executive Vice President and CFO of OSI systems, and I'm here today, with Deepak Chopra, OSI as president and CEO.

Alan I. Edrick: Welcome to the OSI systems fiscal 'twenty four third 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 third quarter financial results before we discuss our results. However, I would like to.

Alan I. Edrick: To remind everyone that today's discussion will include forward looking statements and the company wishes to take advantage of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with respect to such forward looking statements.

Alan I. 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 statement based on subsequent events or new information or otherwise. During today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results.

Alan I. Edrick: 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 press release. I will begin with a high-level summary of our financial performance for the third quarter of Fiscal 24 and then turn the call over to Deepak for a discussion of our business and our operational performance. We will then finish with more detail regarding our financial results and a discussion of our updated outlook for fiscal year 24.

Alan I. Edrick: Please refer to today's earnings press release.

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

Alan I. Edrick: Following record revenues and non-GAAP EPS in Q2.

Alan I. Edrick: Following record revenues and non-GAAP EPS in Q2, our third quarter financial results were very strong, led by the Security Division, which delivered extraordinary revenue growth and a significant increase in year-over-year operating income and adjusted EPS. We are encouraged by the momentum in our overall business, as evidenced by another quarter of strong bookings. Let's start with a high-level summary of our Fiscal 24 Q3 results. First, revenues increased 34% year-over-year to a Q3 record of $405 million, driven by the performance in our security division, where revenues were up 60% year over year. Second, the significant revenue growth led to record Q3 non-gap adjusted earnings per share of $2.16, up 45% from Q3 of the prior fiscal year.

Alan I. Edrick: Our third quarter financial results were very strong led by the security Division, which delivered extraordinary revenue growth and a significant increase in year over year operating income.

Alan I. Edrick: And adjusted EPS.

Alan I. Edrick: We are encouraged by the momentum in our overall business as evidenced by another quarter of strong bookings.

Alan I. Edrick: Let's start with a high level summary of our fiscal 2000 and for our Q3 results.

Alan I. Edrick: First revenues increased 34% year over year to a Q3 record of $405 million.

Alan I. Edrick: Driven by the performance in our security Division, where revenues were up 60% year over year.

Alan I. Edrick: Second the significant revenue growth led to a record Q3 non-GAAP adjusted earnings per share of $2 16.

Alan I. Edrick: Up 45% from Q3 of the prior fiscal year.

Alan I. Edrick: Third.

Alan I. Edrick: Bookings were again strong, with a book-to-bill of just over 1, and we ended the quarter with a backlog of nearly $1.8 billion. The strong backlog provides good visibility for the balance of the fiscal year and into future years. Before diving more deeply into our financial results and discussing the Fiscal 24 Outlook, I will turn the call over to Deepak. Thank you, Alan.

Alan I. Edrick: Bookings were again strong with a book to Bill of just over one and we ended the quarter with a backlog of nearly $1 8 billion.

Alan I. Edrick: The strong backlog provides good visibility for the balance of the fiscal year and into future years.

Alan I. Edrick: Before diving more deeply into our financial results.

Alan I. Edrick: And discussing the fiscal 'twenty four outlook I will turn the call over to Deepak.

Deepak Chopra: Thank you Alan.

Deepak Chopra: And welcome to the OSI Systems earnings call for the third quarter of fiscal 2024. We are very pleased with our fiscal third quarter performance, in which revenues grew 34% to a record $405 million. We had a book to build of exceeding one and finished the quarter with a healthy backlog of about 1.8 billion.

Deepak Chopra: And welcome to the OSI systems earnings call for the third quarter of fiscal 2024.

Deepak Chopra: We are very pleased with our fiscal third quarter performance in which revenues grew 34% to a record $405 million.

Deepak Chopra: We had a book to bill.

Deepak Chopra: Exceeding one and finished the quarter with a healthy backlog of about $1 8 billion.

Deepak Chopra: Our results were primarily driven by our security division, which continues to perform well. I will now discuss some key highlights from our third quarter performance across each division before handing it back to Alan for a further discussion of our financial results, beginning with the security division, where year-over-year revenues grew 60% in Q3. The division's bookings were approximately 10 million plus, achieving a book to build exceeding one.

Deepak Chopra: Our results were primarily driven by our security Division, which continues to perform well.

Deepak Chopra: I will now discuss some key highlights from our third quarter performance across each division.

Deepak Chopra: Before handing it back to Alan for a further discussion of our financial results.

Alan I. Edrick: Beginning with the Security Division, where you had already air revenues grew 60% in Q3.

Deepak Chopra: The dividend is bookings.

Deepak Chopra: While approximately $200 million plush, achieving a book to bill exceeding one.

Deepak Chopra: During the quarter, we continue to deliver on the two major programs. The approximately $500 million contract with CEDENA, which is Mexico's Department of National Defense, for Cargo and Vehicle Inspection Systems, and related services, and a $200 plus million cargo program with another international customer. Our cargo and solutions team has been relentless in its efforts, and both programs are progressing well in March. We announced a new $100 million contract for various cargo and vehicle inspection systems.

Deepak Chopra: During the quarter, we continued to deliver on the two major programs. The approximately 500 million dollar contract with Savannah, which is Mexico's department of National Defense.

Deepak Chopra: Our cargo and vehicle inspection systems.

Deepak Chopra: And related services, and a 200 plus million cargo program with another international customer.

Deepak Chopra: Our cargo and solutions team.

Deepak Chopra: Has been relentless efforts and both programs are progressing well.

Deepak Chopra: As you may recall, we previously announced the receipt of a large award of $59 million at the end of Q2 for Cargo and Vehicle Inspection Systems from another international customer. These significant recent awards, in addition to the combined $7 million in contracts discussed earlier, provide great confidence and sustainable growth worldwide for Cargo as a market leadership breadth of product and solution portfolio. And our ability to deliver is being recognized and awarded going into Q4 and into fiscal 2025.

Deepak Chopra: As you may recall the previous.

Deepak Chopra: Previously announced the receipt of a large award.

Deepak Chopra: In addition to the combined $7 million of contracts discussed earlier.

Deepak Chopra: For wide, great confidence and sustainable growth worldwide for cargo as a market leadership breadth of product and solutions portfolio and our ability to deliver are being recognized and rewarded going into Q4 and into fiscal 2025.

Deepak Chopra: We are spending a fair amount of time here talking about the programs and market traction, but let me take a moment to provide an example here to illustrate how we affect everyday life and well-being with a cargo security product. We learned during the quarter that a U.S. Customs and Border Protection CBP officer at the Camino Real International Bridge on the Texas-U.S.-Mexico border performed a secondary inspection on a suspicious truck manifesting a shipment of chemicals designated for agricultural use.

Deepak Chopra: U S customs and border protection CBP officers.

Deepak Chopra: At the Camino Real International Bridge.

Deepak Chopra: On the deck says U S Mexico border.

Deepak Chopra: Performed a secondary inspection on a suspicious truck manifesting as shipment of chemicals designated for agricultural use.

Deepak Chopra: The scans, utilizing our company's zPortal cargo scanners, revealed anomalies in the cargo, and CBP officers subsequently discovered six and a half tons of methamphetamine which had a street value of 117 million, the largest ever meth seizure in the U.S.

Deepak Chopra: <unk> <unk>.

Deepak Chopra: Utilizing our companies Z portal cargo scanners.

Deepak Chopra: These anomalies in the cargo and CBP officers subsequently discovered Hicks.

Deepak Chopra: Six and a half.

Deepak Chopra: <unk>.

Deepak Chopra: Metal packaging, which had a street value of $117 million.

Deepak Chopra: Our largest ever met seizure in the U S port of entry.

Deepak Chopra: Port of Entry. We are proud to support the U.S. CBP and their critical homeland security mission of stopping illegal drugs and other contraband entering our nation. Moving on to the Aviation and Checkpoints business, it continues to perform well with strong revenues and bookings. During Q3, we announced a $21 million award from an international airport for checkpoint security infrastructure solutions, including our 920 CT computerized tomography screening systems with automated tray return system, along with a multi-year service and support. We also announced a $27 million award from a leading European airport to provide the itemizer 5X and Explosive Trace Detection, ETD Systems, for secondary screening of passengers and carry-on baggage, as a side comment.

Deepak Chopra: We are proud to support the U S CBP and their critical homeland security mission and stopping illegal drugs and other contra bad entering our nation.

Deepak Chopra: Moving onto the aviation and checkpoints business continues to perform well with strong revenues and bookings during Q3.

Deepak Chopra: From an international airport.

Deepak Chopra: Check point security infrastructure solutions, including our <unk>.

Deepak Chopra: Alright, thermography screening systems with automated tray return systems, along with our multiyear service and support.

Deepak Chopra: We also announced a $27 million award from a leading European Airport.

Deepak Chopra: Provided the itemized buybacks explore.

Deepak Chopra: Explosive trace detection <unk> systems.

Speaker Change: A side comment.

Deepak Chopra: ITMISER 5X, in addition to recurring service revenue like other products, also has ongoing revenue, recurring revenue from consumables, which has a very healthy march. And finally, we announced a four-minute award from a leading global air cargo logistics customer to provide various screening systems, including the RTT 110 CT-based explosive detection system, the Orion 927DX, and the 937DX for large package screening, and the 920CX for a smaller package. As you can see from the different products mentioned,

Speaker Change: <unk> buybacks in addition to our recurring service revenue like other products.

Speaker Change: <unk> also has an ongoing revenue recurring revenue of consumables.

Speaker Change: And finally, we announced a $4 million award from a leading global air cargo logistics customer.

Speaker Change: Including the <unk> 10, <unk> based explosive detection system.

Speaker Change: <unk> 927, Dx and the 937 Dx for large package screening.

Speaker Change: In the 920 <unk> smaller packages.

Speaker Change: As you can see from the different projects mentioned.

Deepak Chopra: It helps to have a broad portfolio, which we are proud to say that we have the broadest portfolio compared to our competitors, and utilizing these features and technology variations to provide optimized solutions for customers. We have seen over the last few quarters that airports and air cargo customers are making significant security infrastructure investments, and our business has benefited, and we believe that this trend will continue into fiscal 25 and beyond. A T-turnkey project in Albania, Puerto Rico, Guatemala, and the European airport has been performing as anticipated.

Speaker Change: It helps to have a broad portfolio.

Speaker Change: We are proud to say that we have the broadest portfolio compared to our competitors.

Speaker Change: And utilizing the features and technology variations to provide optimized solutions for customers.

Speaker Change: We have seen over the last few quarters that airports and air cargo customers are.

Speaker Change: Making significant security infrastructure investments and our business has benefit and we believe that this trend will continue into fiscal 'twenty five and beyond.

Speaker Change: Our deep deep projects in Albania.

Speaker Change: While our model.

Speaker Change: And the European airports have been performing.

Speaker Change: Anticipated in addition.

Deepak Chopra: In addition, we are also gearing up to begin our latest turnkey project in Uruguay, which we expect to announce sometime in the summer. In security, we look to finish the year strong. Recent bookings activity and a significant opportunity pipeline suggest continued strong growth demand for 2025 and beyond, moving toward optoelectronics and manufacturing, where it was an uncharacteristically softer core, which we think is a one-off. We continue to work with several major customers to sync with their inventory demand forecast, which has impacted revenues in the short term as we had anticipated.

Speaker Change: We are also getting up to begin our latest darn ragwort.

Speaker Change: Don D, which we expect to comments sometime in summer.

Speaker Change: In security, we look to finish strong.

Speaker Change: <unk> bookings activity and a significant opportunity pipeline suggest continued strong growth demand for 2025 and beyond.

Speaker Change: Moving to our optoelectronics and manufacturing division.

Speaker Change: We're at War, then uncharacteristically softer quarter.

Speaker Change: Which we think is a one off we continue to work with several major customers to sync with the inventory demand forecasts.

Speaker Change: Which has impacted revenues in the short term.

Speaker Change: We had anticipated.

Speaker Change: The Opto Division achieved a book to bill exceeding one for the quarter, which bodes well for the business going forward.

Speaker Change: We announced a couple of those key wins.

Speaker Change: Including a 15 million dollar order from a healthcare OEM to provide critical sub assemblies that are used in its innovative and specialized solutions.

Deepak Chopra: The Opto division achieved a book to bill exceeding one for the quarter, which bodes well for the business going forward. We announced a couple of key wins, including a $15 million order from a health care OEM to provide critical subassemblies that are used in this innovative and specialized solution. We also announced a $3 million award from a major defense electronics OEM to provide sensors for advanced missile systems.

Speaker Change: We also announced a $3 million award from a major defense electronics OEM to provide sensors for advanced missile systems.

Speaker Change: During Q3, we began introducing prospective customers to our new operation in Mexico.

Speaker Change: What date, which has given us significant capacity to help customers aspiring to shift work from Asia the near shore.

Speaker Change: Looking ahead, we expect op.

Speaker Change: Formed in Q4 and believe the division is well positioned for fiscal 'twenty five.

Deepak Chopra: During Q3, we began introducing prospective customers to a new operation in Mexico, Tecate, which has given us a significant capacity to help customers aspiring to shift work from Asia to near shore. Looking ahead, we expect Opto to return to form in Q4 and believe the division is well positioned for Fiscal 25 as the inventory right-sizing winds down with many of our customers. Finally, moving on to the Healthcare Division, where revenues were approximately 6% lower than in the prior year's Q3. This division continues to walk through a challenging hospital defects environment. Despite that,

Speaker Change: The inventory right sizing winds down with many of our customers.

Speaker Change: Finally, moving onto the healthcare division revenues were approximately 6% lower than in the prior year's Q3.

Speaker Change: This division.

Speaker Change: Continues to work through a challenging hospital capex environment despite that.

Speaker Change: <unk> had an active bookings quarter.

Speaker Change: Just before quarter end, we won a 6 million dollar order from a U S based hospital.

Speaker Change: Patient monitoring systems, including exhibit central stations expression patient monitors and guild patient monitors, which we expect to begin delivering in Q4.

Speaker Change: Our patient monitoring solutions allow.

Speaker Change: Customers will enhance their services by integrating features like the safe and sound digital health platform.

Deepak Chopra: Healthcare had an active booking score. Just before quarter end, we won a $6 million order from a U.S.-based hospital for our patient monitoring systems, including Exhibit Central Stations, Expression Patient Monitors, and Q-Patient Monitors, which we expect to begin delivering in Q4. Our patient monitoring solutions allow customers to enhance their services by integrating features like the safe and sound digital health platform and mobile app. This addition enables real-time patient monitoring services.

Speaker Change: And mobile App. This addition enables real time patient monitoring services.

Speaker Change: Additionally, customers can elaborate the rock mining predictive analytics software to access advanced health analytics further augmenting our comprehensive monitoring offerings.

Speaker Change: We continue to invest heavily in developing new products, primarily in our next generation platform for patient monitoring products and solutions.

Speaker Change: Overall, we are excited about our strong finish in fiscal 'twenty, four and continuing our momentum into the next fiscal year and beyond as always I would like to thank our employees customers and stockholders.

Deepak Chopra: Additionally, customers can leverage the Rotman Predictive Health Analytics software to access advanced health analytics, further augmenting our comprehensive monitoring of. We continue to invest heavily in developing new products, primarily in our next generation platform for patient monitoring products and solutions. Overall, we are excited about a strong finish in fiscal 24 and continuing our momentum into the next fiscal year and beyond. As always, I would like to thank our employees, customers, and stockholders for their continued support. With that, I will turn the call back over to Alan to discuss our financial results and guidance in more detail before we open the call to questions. Thank you.

Speaker Change: Continued support with that I will turn the call back over to Alan to discuss our financial results and guidance in more detail before we open it for questions. Thank you.

Alan I. Edrick: Thank you Deepak.

Alan I. Edrick: Now I will review in greater detail the financial results for our third quarter.

Alan I. Edrick: Again, our fiscal 'twenty four Q3 revenues were up 34% compared with revenues in the third quarter of the prior fiscal year.

Alan I. Edrick: The 60% year over year increase in Q3 Security Division revenues was largely the result of sales growth of our cargo and vehicle inspection products.

Alan I. Edrick: We also had double digit percentage revenue growth in our aviation and checkpoint products and related services.

Alan I. Edrick: Q3 revenues included continued shipments from the $200 million plus cargo contract announced in January of 2023, and significant revenues from the $500 million plus cargo contract announced in March of 'twenty three.

Alan I. Edrick: Thank you, Deepak. Now, I will review in greater detail the financial results for our third quarter. Again, our fiscal 24 Q3 revenues were up 34% compared with revenues in the third quarter of the prior fiscal year. The 60% year-over-year increase in Q3 Security Division revenues was largely the result of sales growth of our cargo and vehicle inspection products. We also had double-digit percentage revenue growth in our aviation and checkpoint products and related services.

Alan I. Edrick: Third party auto sales were down approximately 3% year over year.

Alan I. Edrick: As mentioned on last quarter's call, we anticipated that with certain auto customers adjusting inventory levels and ordering patterns.

Alan I. Edrick: Revenues in this division will continue to be impacted over the short term and that has indeed been the case.

Alan I. Edrick: As Deepak mentioned, we see this improving going forward.

Alan I. Edrick: Health care Division sales decreased 6% year over year in this challenging hospital capex environment.

Alan I. Edrick: The fiscal 'twenty four Q3 gross margin of 33, 6% was down from the 34, 3% gross margin in Q3 last year.

Alan I. Edrick: Q3 revenues included continued shipments from the $200 million-plus cargo contract announced in January of 2023 and significant revenues from the $500 million-plus cargo contract announced in March of 2023. However, third party opto sales were down approximately 3% year over year.

Alan I. Edrick: This was largely due to the mix of revenues.

Alan I. Edrick: Our Q3 growth. This year was driven by a significant increase in product revenues, which carry a less favorable margin than service revenues.

Alan I. Edrick: In a less favorable mix of service revenues in the quarter as well.

Alan I. Edrick: Thus, while the gross margin on product sales increased the gross margin on service revenues decreased year over year.

Alan I. Edrick: 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.

Alan I. Edrick: As mentioned on last quarter's call, we anticipated that with certain Opto customers adjusting inventory levels and or ordering patterns, revenues in this division would continue to be impacted over the short term, and that has indeed been the case. As Deepak mentioned, we see this improving going forward. The healthcare division sales decreased 6% year over year in this challenging hospital capex environment.

Alan I. Edrick: Moving to operating expenses.

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

Alan I. Edrick: Q3, SG&A expenses were $66 6 million or 16, 4% of sales compared to 17, 7% of sales in Q3 of the prior year.

Alan I. Edrick: The year over year increase in absolute cost was driven by higher compensation, including incentive compensation linked to our significant sales growth increased professional.

Alan I. Edrick: The fiscal 24 Q3 gross margin of 33.6% was down from the 34.3% gross margin in Q3 last year. This was largely due to the mix of revenues, as our Q3 growth this year was driven by a significant increase in product revenue, which carries a less favorable margin than service revenues, and a less favorable mix of service revenues in the quarter as well. Thus, while the gross margin on product sales increased, the gross margin on service revenues decreased year over year.

Alan I. Edrick: Professional fees and.

Alan I. Edrick: An unfavorable FX among other items.

Alan I. Edrick: Or four 2% of sales comp.

Alan I. Edrick: We continue to dedicate considerable resources to R&D, particularly in our security and healthcare segments. As we remain focused on innovative product development, which we view as vital to the long term success of our businesses.

Alan I. Edrick: Moving to interest and taxes.

Alan I. Edrick: 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, we continue to work diligently across each of our divisions to improve efficiency and to prudently manage our SG&A cost structure. Q3 SG&A expenses were $66.6 million, or 16.4% of sales, compared to 17.7% of sales in Q3 of the prior year.

Alan I. Edrick: Net interest and other expenses in Q3 increased to $7 4 million in fiscal 'twenty four from.

Alan I. Edrick: From $5 7 million in fiscal 'twenty three.

Alan I. Edrick: We executed an interest rate swap during Q1 and fiscal 'twenty three.

Alan I. Edrick: Our reported effective tax rate under GAAP was 22, 6% in Q3.

Fiscal 'twenty four compared to 23, 8% in Q3 of fiscal 'twenty three.

Alan I. Edrick: In Q3 of each of fiscal 'twenty, four and 'twenty three we recognized immaterial amounts of discrete tax items.

Speaker Change: I will now turn to a discussion of our non-GAAP adjusted operating margin.

Alan I. Edrick: The year-over-year increase in absolute costs was driven by higher compensation, including incentive compensation linked to our significant sales growth, increased professional fees, and unfavorable FX, among other items. Research and development expenses in Q3 of fiscal 24 were $17.1 million, or 4.2% of sales, compared to $14.9 million, or 4.9% of sales in the same prior year quarter. We continue to dedicate considerable resources to R&D, particularly in our security and healthcare segments, as we remain focused on innovative product development, which we view as vital to the long-term success of our businesses. We re-recorded $1 million of restructuring and other charges in Q3 of fiscal 24.

Speaker Change: Our adjusted operating margin in the third quarter of fiscal 'twenty four increased to 13, 9% from 12, 9% in Q3 of fiscal 'twenty three.

Speaker Change: Driven by the strong performance of the security Division.

Speaker Change: The adjusted operating margin in our Opto Division decreased to 12, 2% in the third quarter of fiscal 'twenty four from 14, 1% in last year's comparable quarter due to lower sales and a less favorable product mix.

Speaker Change: We anticipate a sequential improvement in this division as we finish out fiscal 'twenty four.

Speaker Change: The healthcare division's adjusted operating margin was negligible given the reduction in the division sales.

Alan I. Edrick: Moving to cash flow.

Alan I. Edrick: We invested significant amounts of working capital associated with the Companys strong growth.

Alan I. Edrick: In Q3 cash used in operations was $52 million.

Alan I. Edrick: Moving to interest and tax, net interest and other expenses in Q3 increased to $7.4 million in Fiscal 24 from $5.7 million in Fiscal 23, primarily due to increased interest rates on a higher level of borrowing. We executed an interest rate swap during Q1 of fiscal 23 to fix a portion of our floating rate bank debt. Our reported effective tax rate under GAAP was 22.6% in Q3 of fiscal 24 compared to 23.8% in Q3 of fiscal 23.

Alan I. Edrick: Primarily due to increases in accounts receivable associated with the security Division revenue growth.

Alan I. Edrick: Capex in Q3 of fiscal 24 was $4 9 million, while depreciation and amortization expense was $10 6 million.

Alan I. Edrick: Our balance sheet is solid with modest net leverage of one five.

Alan I. Edrick: Aside from seven $5 million of annual required principal payments under our bank term loan.

Alan I. Edrick: The bulk of our debt matures in fiscal 'twenty seven.

Speaker Change: And finally, let's turn to guidance.

Alan I. Edrick: We are increasing our non-GAAP diluted EPS guidance to growth of over 30%.

Alan I. Edrick: Earnings per share from fiscal <unk> over fiscal 'twenty three while.

Alan I. Edrick: While maintaining our revenue guidance of an increase of more than 19%.

Alan I. Edrick: With 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.

Alan I. Edrick: In Q3 of each of fiscal 24 and 23, we recognize immaterial amounts of discrete tax items. Excluding the impact of discrete tax items, our normalized non-GAAP effective tax rate in Q3 fiscal 24 was 23.0% compared to a normalized effective tax rate of 23.2% in Q3 of fiscal 23. I will now turn to a discussion of our non-GAAP adjusted operating margin. Overall, our adjusted operating margin in the third quarter of Fiscal 24 increased to 13.9% from 12.9% in Q3 of Fiscal 23, driven by the strong performance of the Security Division.

Alan I. Edrick: We currently believe this guidance reflects reasonable estimates.

Alan I. Edrick: The actual impact on the company's financial results of timing changes on the expected conversion of backlog to revenues disruptions and increased cost in the supply chain and inflation and interest rates is difficult to predict.

Alan I. Edrick: It could vary significantly from the anticipated impact currently reflected in our estimates and guidance.

Alan I. Edrick: Actual results in non-GAAP earnings per share it could vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings.

Alan I. Edrick: We continue to remain focused on the growth of our businesses.

Alan I. Edrick: We believe our efforts will enable OSI to continue providing innovative products and solutions.

Speaker Change: We would like to take this opportunity to again, thank the global OSI team.

Alan I. Edrick: It's continued dedication in supporting our customers and partners.

Speaker Change: And at this time wed like to open the call to questions.

Speaker Change: Thank you and as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment, while we compile our Q&A roster.

Alan I. Edrick: The non-GAAP-adjusted operating margin in the Security Division expanded to 18.6% in Q3 of Fiscal 24 from 18.3% in Q3 of 23, primarily driven by higher product revenue. The adjusted operating margin in our Opto division decreased to 12.2% in the third quarter of fiscal 24 from 14.1% in last year's comparable quarter due to lower sales and a less favorable product mix.

Speaker Change: Our first question is can it comes from the line of Josh Nichols with B Riley. Your line is open. Please go ahead.

Josh Nichols: Thanks for taking my question and great to see the backlog holding near these record level.

Josh Nichols: Levels, despite the big conversion.

Josh Nichols: I thought most people would have expected to see a little bit of a decline I am just kind of curious could you contextualize. This I know youre not giving guidance for next fiscal year, but of that $1 $8 billion backlog you have right now around how much of that is going to be recognized next fiscal year.

Alan I. Edrick: We anticipate a sequential improvement in this division as we finish out Fiscal 24. The healthcare division's adjusted operating margin was negligible given the reduction in the division's sales, moving to cash flow. We invested significant amounts in working capital associated with the company's strong growth. In Q3, cash use and operations were $52 million, primarily due to increases in accounts receivable associated with the security division revenue growth. Capital expenditure in Q3 of Fiscal 24 was $4.9 million, while depreciation and amortization expense was $10.6 million.

Speaker Change: And good question.

Speaker Change: We don't provide necessarily guidance on the rollout of our backlog from a year to year perspective, we could we would say that we do see a significant.

Alan I. Edrick: Portion of that backlog will be recognized in fiscal 'twenty five therefore with a couple of months before the start of our new fiscal year. We believe we have very strong visibility.

Speaker Change: Into next year already at this time not to mention all the bookings that will will tend to get here in Q4 as well before we start fiscal 'twenty five so it really places us in a nice position and gives us a great deal of confidence for for next year.

Alan I. Edrick: Our balance sheet is solid, with modest net leverage of 1.5. Aside from $7.5 million of annual required principal payments under our bank term loan, the bulk of our debt matures in fiscal 27. And finally, let's turn to guidance. We are increasing our non-GAP diluted EPS guidance to growth of over 30% earnings per share over fiscal 23, while maintaining our revenue guidance of an increase of more than 19 percent. This fiscal 24 non-GAAP diluted EPS guidance excludes potential impairment restructuring and other charges, amortization of Acquired Intangible Assets and Non-Cash Interest Expense and their Associated Tax Effects, as well as discrete tax and other non-recurring items.

Speaker Change: Looking at the healthcare Division, though I know, it's not a very big percentage of revenue but.

Speaker Change: It's been a little bit of a headwind and typically has higher margin contribution when looking at for Q, that's usually a pretty strong quarter for healthcare I guess any type of guidance to provide full year expected for the fourth quarter for healthcare.

Speaker Change: Josh I'll give you a little color there and Deepak can add on although we don't provide guidance by division as you recall Q4 of last fiscal year was an extremely strong quarter for our health care Division.

Josh: By a significant booking that we had received in in Q3 and then shipped in Q4. So it provides a pretty tough comp embedded in the guidance that we're providing for OSI systems overall for fiscal 'twenty four.

Josh: Suggests.

Alan I. Edrick: That.

Speaker Change: Got it and then last question for me I mean.

Alan I. Edrick: We currently believe this guidance reflects reasonable estimates. However, the actual impact on the company's financial results of timing changes on the expected conversion of backlog to 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 results and non-GAAP earnings per share could vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filing.

Speaker Change: I know that there was a significant bump in the accounts receivable, but I guess is that like subsequently been.

Alan I. Edrick: Collected in expectations for free cash flow in.

Speaker Change: Fiscal fourth quarter.

Alan I. Edrick: Yes. Good question clearly big investments in working capital receivables are up significantly with the with the heavy growth that we had in our security Division.

Speaker Change: Namely.

Alan I. Edrick: We have collected.

Speaker Change: This amount of cash subsea.

Speaker Change: Subsequent to March 31, as we sit here today and expect to collect a significant amount of cash.

Speaker Change: Through the balance of the quarter as well. However, we think the real turning point for generating the real strong cash flow as fiscal 'twenty fives. So this has been a year of heavy investment in both inventory and receivables and while we expect to continue growing at 25, we think we can start to see a little bit of a reverse course on the big investment in those two areas.

Operator: We continue to remain focused on the growth of our businesses. We believe our efforts will enable OSI to continue providing innovative products and solutions. We would like to take this opportunity to again thank the global OSI team for its continued dedication to supporting our customers and partners. And at this time, we'd like to open the call to questions. Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Speaker Change: <unk>.

Speaker Change: Really drive some nice cash flow next year.

Speaker Change: We're looking forward to seeing and hearing about it I'll hop back in the queue. Thanks.

Speaker Change: Thank you and one moment as we move on to our next question.

Speaker Change: And our next question is going to come from the line of Larry <unk> with <unk>.

Brian William Ruttenbur: CJS Securities. Your line is open. Please go ahead.

Larry: Great. Thanks, and good morning, gentlemen, I guess just a question.

Operator: One moment while we compile our Q&A roster. Our first question is going to come from the line of Josh Nichols with B Riley. Your line is open. Please go ahead.

Josh Nichols: On the on the backlog or the.

Larry: Or I guess my real question is just forward looking backlog, obviously feels like 25 should be another good year for you guys.

Josh Nichols: Thanks for taking my question and great to see the backlog holding near these record levels despite the big conversion. I thought most people would have expected to see a little bit of a decline. I'm just kind of curious; could you contextualize this?

Speaker Change: I guess the.

Josh Nichols: The people.

Speaker Change: We'd get better comfort on maybe.

Speaker Change: As you look out beyond 25.

Larry: You mentioned the impact for the <unk>.

Alan I. Edrick: I know you're not giving guidance for next fiscal year, but of that $1.8 billion backlog you have right now, around how much of that is going to be recognized next fiscal year? Josh, this is Alan, and thanks for the question and the good question. You know, we don't necessarily provide guidance on the rollout of our backlog from a year-to-year perspective, but we would say that we do see a significant portion of that backlog will be recognized in fiscal 25.

Josh Nichols: <unk> opportunities.

Larry: Maybe you could just kind of help us give a little more color there.

Larry: How strong that pipeline is.

Alan: Your confidence level.

Larry: Maybe any given quarter the book to bill fallen below one but.

Larry: Just your comfort level and then over the long run.

Larry: Book to Bill remaining above one and you're continuing to be able to grow that topline beyond once these two larger contracts are.

Larry: Our satisfied over the next couple of years.

Speaker Change: Good question.

Speaker Change: We are very very confident.

Larry: And feel good about the pipeline of activity is quite strong.

Alan I. Edrick: Therefore, you know, with a couple of months before the start of our new fiscal year, we believe we have very strong visibility into next year already at this time, not to mention all the bookings that we'll tend to get here in Q4 as well before we start fiscal 25. So it really places us in a nice position and gives us a great deal of confidence for next year.

Larry: We are entering into the next year with a very strong backlog to begin with.

Larry: But more than that I think the important thing to say is that the whole world Kantar.

Alan I. Edrick: <unk> continues to be more concerned with security all over at the same time as aviation is going up as people do more trade between each country as people are moving from China to other places everywhere you look at it security is an important factor for them.

Josh Nichols: And then good to hear that it sounds like the inventory rightsizing in the opto electronic space is effectively behind the company, looking for some sequential improvement in fiscal 4Q. Looking at the healthcare division, though, I know it's not a very big percentage of revenue, but it's been a little bit of a headwind, and typically it's a higher margin contribution. When looking at 4Q, that's usually a pretty strong quarter for healthcare. I guess any type of guidance that you can provide for what you're expecting for the fourth quarter in healthcare. Josh, I'll give you a little color there, and Deepak can add on, though we don't provide guidance by division.

Larry: And we are very proud to say that we have the broadest product portfolio. We have a very good reputation and the more we do an install and stop our stuff all over the globe.

Larry: It looks like to the customers when they do come to the interest to buy something we are definitely invited to the dance. So we definitely have good prospects good pipeline.

Larry: Good reputation good product portfolio. So all of those things, we think will be very beneficial for not just 25, but beyond and we continue at the same time invest heavily in innovation and new products.

Alan I. Edrick: As you recall, Q4 of last fiscal year was an extremely strong quarter for our health care division, aided by a significant booking that we had received in in Q3 and then shipped in Q4, so it provides a pretty tough comp. Embedded in the guidance that we're providing for OSI Systems overall for fiscal 24, it suggests that we will improve sequentially in our health care revenues over Q3, but we won't be at the level we were at in Q4 of last year. I got it.

Larry: And we really feel very confident this will continue.

Speaker Change: Okay great.

Speaker Change: Question around.

Larry: You mentioned sort of the margin profile and.

Alan I. Edrick: Probably explain some of the sequential kind of drop in margin security I know last quarter, you had called out that when it was over 22 that that was a little bit of an anomaly on the upside but just.

Larry: On the ship downtime that sit down this quarter it sounds like it's more just the mix shift.

Josh Nichols: Less service revenue and more.

Larry: Of the new product revenue.

Speaker Change: Just trying to get a little better color.

Larry: Over the longer term or even the next couple of years do you expect margins generally.

Larry: Carrier Division.

Speaker Change: Go higher.

Larry: Does that is there any.

Larry: Reflection based on where you stand on some of the ramp of these orders.

Alan I. Edrick: You know, clearly, big investments in working capital receivables are up significantly with the heavy growth that we had in our security division. We have collected a nice amount of cash since March 31st, as we sit here today, and expect to collect a significant amount of cash through the balance of the quarter as well. However, we think the real turning point for generating real strong cash flow is fiscal 25.

Alan I. Edrick: Margins to the margins get better as <unk>.

Speaker Change: So to complete.

Speaker Change: Progress with some of these larger orders.

Speaker Change: Is there any economies of scale.

Alan I. Edrick: The orders or overall as you get more and more orders I'm, just trying to get a basic kind of little more context on just the margin.

Speaker Change: Short term and more mid to longer term outlook. Thanks.

Speaker Change: Sure Larry Good question. This is Alan Thank you.

Alan I. Edrick: Our goal is always to couple of topline growth with margin expansion and I think we've been able to do that.

Josh Nichols: So this has been a year of heavy investment in both inventory and receivables. And while we expect to continue growing at 25, we think we can start to see a little bit of a reverse course on the big investment in those two areas to really drive some nice cash flow next year. Well, I'm looking forward to seeing and hearing about it. I'll hop back in the queue.

Alan I. Edrick: Historically on a on a year over year basis quite regularly certain quarters based upon the mix of revenues by the product by the customer.

Speaker Change: May shift margins around a bit but as we look forward. Our goal is to continue to expand our operating margins in the security division on a on an annual basis and when we look out not just what's in our backlog, but the pipeline of opportunities expanding out into 'twenty six 'twenty, 7% 28, we think there's ample opportunity to do that given the strong <unk>.

Operator: Thank you, and one moment as we move on to our next question. And our next question is going to come from the line of Larry Solow with EJS Securities. Your line is open. Please go ahead.

Speaker Change: Backlog that we have right now and as Deepak alluded to with the great confidence in 25, where at this point, we're already beginning to fulfill.

Speaker Change: Things in 'twenty, six and even into 2007. So we're really we're really focused on on a lot of those out years and we think there is a margin potential in all of those.

Lawrence Scott Solow: Great, thanks, and good morning, gentlemen. I guess just a question on the backlog or the, or I guess my real question is just forward-looking. So, the backlog obviously feels like 2025 should be another good year for you guys. I guess people would get better comfort maybe, you know, as we look out beyond 2025.

Speaker Change: Just like if I look at Mexico today on a contract in particular, because that's the big one obviously, probably makes up a quarter of your backlog or something like that.

Speaker Change: What is the margin on that.

Lawrence Scott Solow: Seems like as you progressed I imagine beyond the $500 million service component, which is probably.

Lawrence Scott Solow: And you mentioned, Deepak, sort of the pipeline of opportunities. You could just kind of help us give a little more color there, just, you know, how strong that pipeline is and, you know, your confidence level, maybe any given quarter, the book-to-bill has fallen below one, but, you know, just your comfort level and then, over the long run, your book-to-bill remains above one, and you're continuing to be able to grow that top line beyond, you know, once these Good question.

Speaker Change: Maybe you can give us some color on what percentage of that will be but.

Larry: How much revenue that'll be annually, but I imagine that margin will be a lot better too, but does that margin also improve like the back half get better you get better at it is there any difference in margin.

Larry: As you fulfill that contract.

Deepak Chopra: So Larry so the contract that you're referring to consist of multiple different products.

Speaker Change: Well as service so the margin will differ a little bit depending upon the products and the mix of products that we're fulfilling in a particular quarter.

Speaker Change: Our team is actually doing an outstanding job on that.

Speaker Change: But youre right as we move into the service element service generally carries a higher margin than our product revenue and we would expect that to be the case here too. So as we start getting those annual recurring revenues from service.

Deepak Chopra: We are very, very confident and feel good about it. The pipeline of activity is quite strong. We are entering into the next year with a very strong backlog to begin with. But more than that, I think the important thing to say is that the whole world continues to be more concerned with security all over, at the same time as aviation is going up, as people do more trade between each country, as people are moving from China to other places. Everywhere you look at it, security is an important factor.

Speaker Change: Most warranty.

Speaker Change: Then that will be a nicely margin accretive to us as well, but it's been a very nice contract for us.

Speaker Change: Got it okay, great I appreciate the color thanks, guys.

Speaker Change: Thank you and one moment as we move on to our next question.

Speaker Change: Okay.

Speaker Change: And our next question is going to come from the line of Jeff Martin with Roth <unk>.

Jeffrey Michael Martin: Your line is open. Please go ahead.

Jeffrey Michael Martin: Thank you and Hello, Deepak and Alan.

Jeffrey Michael Martin: I wanted to dive in obviously.

Deepak Chopra: And we are very proud to say that we have the broadest product portfolio. We have a very good reputation. And the more we do and install and spread our stuff all over the globe, the more it looks like to the customers when they do have an interest to buy something, we are definitely invited to the dance. So we definitely have good prospects, a good pipeline, a good reputation, and a good product portfolio. So all those things we think will be very beneficial for not just 25 but beyond. And we continue to, at the same time, invest heavily in innovation and new products, and we really feel very confident this will continue. Okay, great.

Jeffrey Michael Martin: Cargo and vehicle inspection and the international markets.

Jeffrey Michael Martin: And a huge opportunity for us still not a mature market I was curious if you could just comment with respect to that.

Jeffrey Michael Martin: And also kind of lay out how you see OSI.

Speaker Change: Position competitively relative to the other providers that you see out there.

Deepak Chopra: This is deepak here.

Deepak Chopra: We feel good about it I've said it before that we.

We are proud to say that we have the broadest product portfolio compared to our competitors.

Deepak Chopra: Also we can also say that especially in the cargo and solutions.

Deepak Chopra: Our space.

We now can say broadly that we are number one.

Deepak Chopra: So as you get larger as Yo Yo product line gets more accepted as you get more broader reach in the world and getting a good reputation.

Lawrence Scott Solow: I guess question for Alan, just on the margin profile and you mentioned sort of the, the margin profile and probably explain some of the sequential kind of drop in margin secured. I know last quarter, you had called out that when it was over 22, that that was a little bit of an anomaly on the upside. But just, you know, on the shift down time, this shift down this quarter, it sounds like it's more just a mixed shift, less service revenue and more new product revenue.

Lawrence Scott Solow: Continue to draw motor traction and preferential from the customers. They cannot country is going to put millions of dollars at stake for any vendor unless it's tried and have a good reputation.

Deepak Chopra: So we are quite happy with what we are doing we are very much focused at the same time to continue to do better.

Lawrence Scott Solow: Just trying to get a little better color over the longer term or even the next couple of years. Do you expect margins generally to go higher in the security division? You know, does that, is there any reflection based on where you stand on some of the ramp of these orders, that the margins, do the margins get better as, you know, as you sort of complete some, as you, you know, progress with some of these larger orders?

Deepak Chopra: Team is doing a marvelous job.

Lawrence Scott Solow: While we keep talking about cargo yogurt, you a question about cargo, but even in the aviation space.

Deepak Chopra: Some great successes.

Lawrence Scott Solow: We have a very good product line, we continue to look at our broader product line and we think that as aviation traffic improves that will continue.

Deepak Chopra: And not to forget the thing that most people ignore it that the air cargo space continues to grow too and that's also very good and we have the largest installed base even in that space. So all in all.

Lawrence Scott Solow: Is there any economies of scale within the orders or overall as you get more and more orders? I'm just trying to get a basic kind of context on just the margins, short term and more mid to long term.

Deepak Chopra: We think that we are well suited for not just domestically, but internationally and we continue to look at it and be focused and working with our customers and listening to the customers what they want.

Alan I. Edrick: Sure Larry, good question, this is Alan. Our goal is always to couple top-line growth with margin expansion, and I think we've been able to do that historically on a year-over-year basis quite regularly. Certain quarters, based upon the mix of revenues by the product or by the customer, may shift margins around a bit. But as we look forward, our goal is to continue to expand our operating margins in the security division on an annual basis.

Speaker Change: That's great.

Alan I. Edrick: Deepak could you comment and maybe an update on what you think might happen with potential follow on orders from the U S customs and border patrol.

Alan I. Edrick: Well.

Alan I. Edrick: But obviously, we have those two big iqs.

Alan I. Edrick: And now that the.

Deepak Chopra: The budgets have been settled there.

Deepak Chopra: We are looking forward to it and we think that for the next year.

Deepak Chopra: Year are solid even more there'll be more requirement and again like I said, we are well placed.

Alan I. Edrick: And when we look at not just what's in our backlog but the pipeline of opportunities expanding out into 26, 27, 28, we think there's ample opportunity to do that. Given the strong backlog that we have right now, and as Deepak alluded to, with the great confidence in 25, at this point, we're already beginning to fulfill things in 26 and even into 27.

Deepak Chopra: And we think that going into fiscal 'twenty, five there'll be a lot more activity.

Deepak Chopra: All in all not just to the border patrol, but state Department Dod.

Deepak Chopra: And as we mentioned in the last conference call.

Deepak Chopra: Yes, it's unfortunate for all the international events that are happening in Ukraine around that area of the middle east and stuff, but as they settle down.

Deepak Chopra: There's going to be much more requirement for security equipment to protect the western allies people and we again think that the government will finance it and we are well placed for it.

Alan I. Edrick: So we're really focused on a lot of those years, and we think there's margin potential in all of those. And just like, if I look at Mexico, the Sedana contract in particular, because that's a big one, obviously, probably makes up still a quarter of your backlog or something like that. Does the margin on that, you know, change, like, as you progress?

Deepak Chopra: Sure.

Speaker Change: Makes sense.

Deepak Chopra: Finally.

Speaker Change: How are you thinking about capital allocation next year, because you're going to be generating significant free cash flow as that working capital investment flips into into cash generation.

Deepak Chopra: Jeff This is Alan here, yes from a capital allocation perspective, we principally look at three areas and we don't necessarily look at them as mutually exclusive we can oftentimes do all three.

Lawrence Scott Solow: I mean, beyond that $500 million, the service component, which is probably, you know, maybe you can give us some call on what percentage of that will be, but as a percent of, you know, how much revenue that will be annually. But I imagine that margin will be a lot better, too. But does that margin also improve, like, the back half, get better? Do you get better at it?

Lawrence Scott Solow: We expect to grow nicely organically, but we always look to supplement that with strategic M&A as well. So some of the cash flow could very well go to some some acquisition targets.

Alan I. Edrick: Stock buyback is something we've historically been very active in not as much. This year as we've been investing so much in working capital and then any residual cash that we have.

Alan I. Edrick: You know, is there any difference in margin, you know, as you fulfill that contract? Larry, the contract that you're referring to consists of multiple different products as well as services, so the margin will differ a little bit depending upon the products and the mix of products that we're fulfilling in a particular quarter. Our team is actually doing an outstanding job on that, but you're right, as we move into the service element, service generally carries a higher margin than our product revenue, and we would expect that to be the case here, too. So as we start getting those annual recurring revenues from service post-warranty..., then that will be nicely margin accretive to us as well. But it's been a very nice contract for us. Okay, great.

Alan I. Edrick: We would use to pay down our borrowings.

Speaker Change: Thank you.

Speaker Change: And before we take our next question, ladies and gentlemen, if you do wish to ask a question at this time. Please press star one on your telephone.

Deepak Chopra: And our next question is going to come from the line of Christopher Glynn with Oppenheimer <unk> Co. Your line is open. Please go ahead.

Christopher D. Glynn: Hey, thanks.

Christopher D. Glynn: Just wanted to.

Christopher D. Glynn: Sort of asking supply chain question, a bit as pertains to gross margin you talked about the gross margin year over year mix dynamics I'm curious.

Alan I. Edrick: 60.

Alan I. Edrick: 60% security growth, how is that supply chain performing you've seen.

Lawrence Scott Solow: I appreciate the call. Thank you, and one moment as we move on to our next question. And our next question is going to come from the line of Jeff Martin with Roth MKM. Your line is open. Please go ahead.

Christopher D. Glynn: Variability around expedited costs just curious.

Jeffrey Michael Martin: If there was any material variability sequentially on supply chain or if that sequential bridge in gross margin was was really just the mix dynamics as well.

Jeffrey Michael Martin: Thank you. And hello, Deepak and Alan. Wanted to dive in, you know, obviously, Cargo and Vehicle Inspection in the International Market, huge opportunity for you, still not a mature market. I was curious if you could just comment with respect to that and also kind of lay out how you see OSI coming together, positioned competitively relative to the other providers that you see out there. This is Deepak here.

Deepak Chopra: Very good question.

Speaker Change: Excuse me <unk>.

Speaker Change: And definitely as you ramp up so fast.

Speaker Change: Supply chain is a challenge.

Deepak Chopra: We have good context, we've done well, we manage it well.

Deepak Chopra: And our ability.

Christopher D. Glynn: The ability to be global even in our manufacturing has helped us very much.

Christopher D. Glynn: But the challenges out there, but we think that we have been successful in managing it well.

Christopher D. Glynn: And.

Christopher D. Glynn: Some of those big things that were a couple of quarters at post Covid.

Christopher D. Glynn: After cost prices, the freight and stuff that has stabilized.

Christopher D. Glynn: And we think that going forward.

Christopher D. Glynn: We have it under control and we can manage it well.

Deepak Chopra: Alan you want to add something sure and create some of the changes you see in gross margin for OSI overall year over year and sequentially is really a function of product versus service with these two large contracts right now, we're delivering substantial product revenue growth and the product revenues.

Deepak Chopra: So as you get larger, as your product line gets more accepted, as you get a wider reach in the world and get a good reputation, you continue to attract more attention and preferential customers because no country is going to put millions of dollars at stake with any vendor unless it's tried and has a good reputation. So we are quite happy with what we are doing. We are very much focused at the same time to continue to do better. The team is doing a marvelous job.

Christopher D. Glynn: We carry a lower gross margin than service. So as a result, when we consolidate the whole thing our gross margin.

Deepak Chopra: Would be impacted by that once we finish delivering these products and it becomes.

Alan I. Edrick: Added service revenue, that's really an opportunity to to enhance the gross margin overall, but that being said, even where there may be a little dip in the gross margin because of higher product related revenues is still is very.

Deepak Chopra: But we keep talking about cargo, your question about cargo, but even in the aviation space, we've had some great successes. We have a very good product line. We continue to look at a broader product line. And we think that as aviation traffic improves, that will continue. And not to forget the thing that most people ignore, that the air cargo space continues to grow, too. And that's also very good.

Alan I. Edrick: A nice contribution to the operating margins.

Alan I. Edrick: Thanks.

Alan I. Edrick: Follow ups on O&M segment.

Alan I. Edrick: I guess the.

Alan Edric: Declines on the external sales arent that.

Alan Edric: Really extreme given.

Alan Edric: We're in the lead time and inventory correction period.

Speaker Change: Sound pretty constructive going forward.

Deepak Chopra: I'm just curious if you could talk a little bit more about.

Deepak Chopra: That visibility how.

Deepak Chopra: And we have the largest installed base, even in that space. So all in all, we think that we are well-suited to not just domestically but internationally. And we continue to look at it, and be focused, and work with the customers, and listen to the customers about what they want. Great. Deepak, could you comment, or maybe Alan, on an update on what you think might happen with a potential follow-on order from the U.S. Customs and Border Protection? Well, you know, obviously, we have those two big IDIQs.

Deepak Chopra: How much is tied to direct specifications, there any verticals like defense or medical.

Alan Edric: Or whatever you want to provide in terms of.

Alan Edric: Where you see the trust picking back up for <unk>.

Speaker Change: Good question.

Deepak Chopra: I mean, we did say on our call.

Deepak Chopra: <unk>.

Speaker Change: Book to Bill was one one for the Opto group.

Alan: That shows that we think there is more stability going forward.

Alan Edric: And we will get back on track.

Alan Edric: The segments.

Alan Edric: We think are going to get back to normal the debt inventory adjustment.

Speaker Change: Consumer products might be a little bit behind.

Deepak Chopra: And now that the budgets have been settled there, we are looking forward to it. And we think that for the next year or so or even more, there'll be more requirements. And again, like I said, we are well-placed, and we think that going into fiscal 25, there'll be a lot more activity. So, all in all, not just the Border Patrol, but State Department, DOD, and as we mentioned in the last conference call, yes, it's unfortunate about all the international events that are happening in Ukraine, around that area, the Middle East and stuff, but as they settle down, there's going to be And finally, how are you thinking about capital allocation next year because you're going to be generating significant free cash flow as that working capital investment flips into cash. Jeff, this is Alan here.

Alan Edric: As the especially as the budgets get bashed has the stuffed keeps happening with the aid to Ukraine, and Israel and stuff.

Alan Edric: The aerospace defense business.

Alan Edric: Then start picking up again.

Alan: Well designed into it.

Alan Edric: The automotive industry is up there and we supply to that our medical industry, though data is a lot of.

Deepak Chopra: The tension on the Capex and nimble hospital market, but there is still a lot of need for what I call devices and.

Alan Edric: Kind of think consumables and we supply product for that so we think overall.

Alan Edric: All the segments will do well one of the good things. We can proudly say we are not dependent on any one segment. We are very broad segment based and we think that overall the business is going to start growing Alan.

Alan I. Edrick: Yes, from a capital allocation perspective, we principally look at three areas, and we don't necessarily look at them as mutually exclusive. We can often do all three. You know, we expect to, you know, grow nicely organically, but we always look to supplement that with strategic M&A as well. So some of the cash flow could very well go to some acquisition targets, stock buyback is something we've historically been very active in, not as much this year as we've been investing so much in working capital, and then any residual cash that we have, we would use to pay down our borrowing.

Speaker Change: Yes, I think Thats I think thats, the case and I think you're right Chris.

Alan I. Edrick: The third party sales reduction in light of some of the corrections on on inventory levels from some of our customers was with somewhat modest and while that may continue a little bit more into Q4, we do expect to see a nice sequential improvement in revenues overall, and we are seeing that across our across the spectrum.

Alan I. Edrick: We're quite diversified between.

Alan Edric: Between industrial medical defense and automotive technology companies like like Deepak was mentioning so.

Alan Edric: We're highly encouraged that we'll see a nice pick up here in Q4 over Q3.

Alan I. Edrick: Thank you, and before we take our next question, ladies and gentlemen, if you do wish to ask a question at this time, please press star one one on your telephone. And our next question is going to come from the line of Christopher Glynn with Oppenheimer & Co. Your line is open, please go ahead.

Christopher D. Glynn: Great. Thanks for the color.

Alan Edric: Thank you and I'm showing no further questions at this time and I would like to hand, the conference back to Deepak Chopra for closing remarks.

Deepak Chopra: Thank you once again for attending our conference call. We look forward to speaking with you over the next year end call in August.

Christopher D. Glynn: Uh, thanks, um, I just wanted to, uh, sort of ask a supply chain question as regards gross margin. You talked about gross margin year over year dynamics. I'm curious, you know, with 60% security growth, how is that supply chain performing? You know, you've seen, you know, variability around expedited costs. Curious, you know, if there was any material variability sequentially in the supply chain, or if that sequential bridge and gross margin was really just the mixed dynamics as well. Well, very good question. Excuse me.

Deepak Chopra: Thank you to everybody our employees.

Deepak Chopra: And to our investors stockholders and our customers. Thank you very much.

Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.

Alan Edric: Okay.

Alan Edric: [music].

Alan Edric: Okay.

Christopher D. Glynn: Okay.

Alan Edric: [music].

Alan Edric: Yes.

Alan Edric: [music].

Alan Edric: Yes.

Christopher D. Glynn:

Deepak Chopra: Definitely, as you ramp up so fast. The supply chain is a challenge. We have good contacts, we've done well, we've managed it well, and our ability to be global, even in our manufacturing, has helped us very much. But the challenges are there, but we think that we have been successful in managing it well, and uh, some of those big things that were a couple of quarters ago at post-covid of the cost prices, the freight, and stuff that has stabilized. And we think that going forward. We have it under control, and we can manage it well. Alan, do you want to add something?

Alan Edric: [music].

Alan Edric: Yes.

Alan Edric: [music].

Alan Edric: Yes.

Deepak Chopra: [music].

Alan I. Edrick: Sure. And Chris, some of the changes you see in gross margin, you know, for OSI overall, year over year and sequentially, are really a function of product versus service. You know, with these two large contracts right now, we're delivering substantial product revenue growth, and product revenues inherently carry a lower gross margin than service revenues. So as a result, when we consolidate the whole thing, our gross margin would be impacted by that added service revenue, but that's really an opportunity to enhance the gross margin overall.

Alan I. Edrick: But that being said, even where there may be a little dip in the gross margin because of higher product-related revenues, it still is a very nice contribution to the operating margin. Thanks, and follow-up on the O&M segment. I guess the declines on external sales aren't that... really extreme given we're in a lead time and inventory correction period and you sound pretty constructive going forward. I'm just curious if you could talk a little bit more about that visibility, how much is tied to direct specifications. Are there any verticals like defense or medical or whatever you want to provide in terms of where you see the thrust picking back up for opt-out? Good question.

Christopher D. Glynn: Firstly, I mean, we did say on the call that the Book Bull Bill wasn't one for the Opto group, which shows that we think there's more stability going forward, and we'll get back on track. Most of the segments are, we think, are going to get back to normal with the inventory adjustment. Consumer products might be a little bit behind, but especially as the budgets get passed, as the stuff keeps happening with the aid to Ukraine and Israel and stuff, the aerospace defense business will then start picking up again. We are well designed for it.

Deepak Chopra: The automotive industry is up there, and we supply to that. Our medical industry, though there is a lot of, you know, tension on the capex in the hospital market, but there is still a lot of need for what I call devices and those kind of things, and we supply products for that. So we think overall all the segments will do well. One of the good things we can proudly say is that we are not dependent on any one segment. We are in a very broad segment, and we think that, overall, the business is going to start growing. Yeah, I think that's the case, and I think you're right, Chris.

Alan I. Edrick: You know, the third-party sales reduction in light of some of the corrections on inventory levels from some of our customers was somewhat modest. And while that may continue a little bit more into Q4, we do expect to see a nice sequential improvement in revenues overall. And we are seeing that across the spectrum.

Deepak Chopra: Thank you, and I'm showing no further questions at this time, and I would like to hand the conference back to Deepak Chopra for closing remarks. Thank you once again for attending our conference call. We look forward to speaking with you on the next year-end call in August. Thank you to everybody, our employees, and to our investors, stockholders, and our customers. Thank you very much.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Alan Edric: [music].

Operator: [inaudible] Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Good day and thank you for standing by. Welcome to the OSI Systems Inc. 3rd Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode.

Operator: 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 11 on your telephone. You will then hear an automated message advising you that your hand is raised.

Alan I. Edrick: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Edrick, Chief Financial Officer. Please go ahead.

Alan I. Edrick: Good morning, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems, and I am here today with Deepak Chopra, OSI's President and CEO. Welcome to the OSI Systems Fiscal 24 3rd Quarter Conference Call. We are pleased that you could join us as we review our financial and operational results. Earlier today, we issued a press release announcing our 2024 fiscal year third quarter financial results. 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 1995 with respect to such forward-looking statements.

Alan I. Edrick: Following record revenues and non-GAAP EPS in Q2, our third quarter financial results were very strong, led by the Security Division, which delivered extraordinary revenue growth and a significant increase in year-over-year operating income and adjusted EPS. We are encouraged by the momentum in our overall business, as evidenced by another quarter of strong booking. Let's start with a high-level summary of our Fiscal 24 Q3 results. First, revenues increased 34% year-over-year to a Q3 record of $405 million, driven by the performance in our security division, where revenues were up 60% year over year. Second, the significant revenue growth led to record Q3 non-gap adjusted earnings per share of $2.16, up 45% from Q3 of the prior fiscal year.

Alan I. Edrick: Bookings were again strong, with a book-to-bill of just over one, and we ended the quarter with a backlog of nearly $1.8 billion. The strong backlog provides good visibility for the balance of the fiscal year and into future years. Before diving more deeply into our financial results and discussing the fiscal 24 outlook, I will turn the call over to Deepak. Thank you, Alan, and welcome to the OSI Systems earnings call for the third quarter of fiscal 2024.

Josh Nichols: [music].

Alan I. Edrick: We are very pleased with our fiscal third quarter performance, in which revenues grew 34% to a record $405 million. We had a book to build of exceeding one and finished the quarter with a healthy backlog of about 1.8 billion.

Speaker Change: Good day and thank you for standing by welcome to the OSI Systems, Inc. Third 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 the session you will need to press star one on your telephone you will then hear an automated message.

Speaker Change: Richard advising you your hand is raised to withdraw your question. Please press star one again.

Alan Edric: Be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today, Alan Edric, Chief Finance Chief Financial Officer. Please go ahead.

Deepak Chopra: As you may recall, we previously announced the receipt of a large award of $59 million at the end of Q2 for cargo and vehicle inspection systems from another international customer. These significant recent awards, in addition to the combined $7 million in contracts discussed earlier, provide great confidence and sustainable growth worldwide for Cargo as a market leadership breadth of product and solution portfolio. And our ability to deliver is being recognized and awarded going into Q4 and into fiscal 2025.

Deepak Chopra: Hi, good morning, and thank you for joining us I'm, Alan address executive Vice President and CFO of OSI systems, and I'm here today, with Deepak Chopra, OSI as president and CEO.

Speaker Change: Welcome to the OSI systems fiscal 'twenty four third 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 third quarter financial results before we discuss our results. However, I would.

Deepak Chopra: Like to remind everyone that today's discussion will include forward looking statements and the company wishes to take advantage of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with respect to such forward looking statements.

Speaker Change: All forward looking statements made on this call are based on currently available information.

Speaker Change: And the company undertakes no obligation to update any forward looking statements based on subsequent events or new information or otherwise.

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

Speaker Change: For further information regarding non-GAAP measures and comparable GAAP measures of the company's results and a quantitative reconciliation of those figures. Please.

Deepak Chopra: The scans, utilizing our company's zPortal cargo scanners, revealed anomalies in the cargo, and CBP officers subsequently discovered six and a half tons of metapatine, which had a street value of 117 million, the largest ever met seizure in the U.S.

Deepak Chopra: Please refer to today's earnings press release.

Speaker Change: I will begin with a high level summary of our financial performance for the third quarter of fiscal 'twenty four and then turn the call over to <unk> for a discussion of our business and our operational performance.

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

Deepak Chopra: Port of Entry. We are proud to support the U.S. CBP and their critical homeland security mission of stopping illegal drugs and other contraband entering our nation. Moving on to the Aviation and Checkpoints business, it continues to perform well with strong revenues and bookings. During Q3, we announced a $21 million award from an international airport for checkpoint security infrastructure solutions, including our 920 CT computerized tomography screening systems with automated tray return system, along with our multi-year service and support. We also announced a $27 million award from a leading European airport to provide the itemizer 5x and Explosive Trace Detection, ETD Systems, for secondary screening of passengers and carry-on baggage, as a side comment.

Alan Edric: Following record revenues and non-GAAP EPS in Q2, our third quarter financial results were very strong led by the security Division, which delivered extraordinary revenue growth and a significant increase in year over year operating income and adjusted EPS.

Deepak Chopra: We are encouraged by the momentum in our overall business.

Deepak Chopra: As evidenced by another quarter of strong bookings.

Deepak Chopra: Let's start with a high level summary of our fiscal 'twenty for our Q3 results.

Operator: First revenues increased 34% year over year to a Q3 record of $405 million driven by the performance in our security Division, where revenues were up 60% year over year.

Deepak Chopra: Second the significant revenue growth led to a record Q3 non-GAAP adjusted earnings per share of $2 16.

Lawrence Scott Solow: 45% from Q3 of the prior fiscal year.

Deepak Chopra: Third book.

Deepak Chopra: Itemizer 5X, in addition to recurring service revenue like other products, also has ongoing revenue, recurring revenue from consumables, which has a very healthy mark. And finally, we announced a $4 million award from a leading global air cargo logistics customer to provide various screening systems, including the RTT 110 CT-based explosive detection system, the Orion 927DX, and the 937DX for large package screening, and the 920CX for a smaller package. As you can see from the different products mentioned,

Alan Edric: Bookings were again strong with a book to bill of just over one.

Deepak Chopra: And we ended the quarter with a backlog of nearly $1 8 billion.

Alan Edric: The strong backlog provides good visibility for the balance of the fiscal year and into future years.

Deepak Chopra: Before diving more deeply into our financial results and.

Deepak Chopra: And discussing the fiscal 'twenty four outlook I will turn the call over to Deepak.

Speaker Change: Thank you Alan.

Deepak Chopra: And welcome to the OSI systems earnings call for the third quarter of fiscal 2024.

Deepak Chopra: We are very pleased with our fiscal third quarter performance in which revenues grew 34% to a record $405 million.

Deepak Chopra: It helps to have a broad portfolio, which we are proud to say that we have the broadest portfolio compared to our competitors, and utilizing these features and technology variations to provide optimized solutions for customers. We have seen over the last few quarters that airports and air cargo customers are making significant security infrastructure investments, and our business has benefited, and we believe that this trend will continue into fiscal 25 and beyond. Our turnkey projects in Albania, Puerto Rico, Guatemala, and the European airport have been performing as anticipated.

Deepak Chopra: We had a book to bill.

Deepak Chopra: Exceeding one.

Deepak Chopra: <unk> finished the quarter with.

Deepak Chopra: With a healthy backlog of about $1 8 billion.

Deepak Chopra: Our results were primarily driven by our security Division, which continues to perform well.

Larry Solow: I will now discuss some key highlights from our third quarter performance across each division.

Speaker Change: Before handing it back to Alan for a further discussion of our financial results.

Speaker Change: Beginning with the Security Division, where you had already air revenues grew 16% in Q3.

Speaker Change: The dividend is bookings.

Speaker Change: We're approximately 200 million plush, achieving a book to bill exceeding one.

Speaker Change: During the quarter, we continued to deliver on the two major programs. The approximately 500 million dollar contract with Savannah, which is Mexico's department of National Defense.

Deepak Chopra: In addition, we are also gearing up to begin our latest turnkey project in Uruguay, which we expect to announce sometime in the summer. In security, we look to finish the year strong. Recent bookings activity and a significant opportunity pipeline suggest continued strong growth demand for 2025 and beyond. Moving toward the optoelectronics and manufacturing division, where it was an uncharacteristically softer core, which we think is a one-off. We continue to work with several major customers to sync with their inventory demand forecast, which has impacted revenues in the short term as we had anticipated.

Deepak Chopra: Our cargo and vehicle inspection systems.

Deepak Chopra: And related services, and a 200 plus million cargo program with another international customer.

Speaker Change: Our cargo and solutions team.

Deepak Chopra: Has been relentless efforts and both programs are progressing well.

Speaker Change: In March we announced a new $100 million contract for various cargo and vehicle inspection systems.

Speaker Change: As you May recall, we previously announced the receipt of a large award.

Speaker Change: $59 million at the end of Youtube for cargo and vehicle inspection systems from another international customer.

Deepak Chopra: These significant recent awards and.

Deepak Chopra: The Opto division achieved a book-to-bill exceeding one for the quarter, which bodes well for the business going forward. We announced a couple of key wins, including a $15 million order from a health care OEM to provide critical subassemblies that are used in this innovative and specialized solution. We also announced a $3 million award from a major defense electronics OEM to provide sensors for advanced missile systems.

Speaker Change: In addition to the combined $7 million of contracts discussed earlier.

Speaker Change: Our wide, great confidence and sustainable growth worldwide.

Speaker Change: Cargo has a market leadership breadth of product and solutions portfolio and our ability to deliver auditing recognized and awarded going into Q4 and into fiscal 2025.

Deepak Chopra: We learned during the quarter.

Deepak Chopra: U S customs and border protection CBP officers.

Deepak Chopra: At Camino Real International Bridge.

Deepak Chopra: On the deck says U S Mexico border.

Deepak Chopra: Performed a secondary inspection on a suspicious truck.

Speaker Change: Manifesting a shipment of chemicals designated for agricultural use the <unk>.

Speaker Change: <unk> <unk>.

Speaker Change: Utilizing our companies Z portal cargo scanners.

Deepak Chopra: This division continues to work through a challenging hospital TAPAX environment. Despite that... Healthcare had an active booking score. Just before quarter end, we won a $6 million order from a U.S.-based hospital for our patient monitoring systems, including Exhibit Central Stations, Expression Patient Monitors, and Q-Patient Monitors, which we expect to begin delivering in Q4. Our patient monitoring solutions allow customers to enhance their services by integrating features like the safe and sound digital health platform and mobile app. This addition enables real-time patient monitoring services.

Speaker Change: These anomalies in the cargo and CBP officers subsequently discovered.

Speaker Change: Six and a half tons.

Deepak Chopra: Meta <unk>, which had a street value of $117 million.

Deepak Chopra: Our largest ever met stage here in the U S port of entry.

Speaker Change: We are proud to support the U S CBP and their critical homeland security mission and shopping illegal drugs and other contract bag entering our nation.

Speaker Change: Moving on to the aviation and checkpoints business continues to perform well with strong revenues and bookings during Q3.

Speaker Change: We announced $21 million.

Speaker Change: From an international airport.

Speaker Change: Checkpoint security infrastructure solutions, including our 920 <unk>.

Deepak Chopra: Additionally, customers can leverage the Rothman Predictive Health Analytics software to access advanced health analytics, further augmenting our comprehensive monitoring of. We continue to invest heavily in developing new products, primarily in our next generation platform for patient monitoring products and solutions. Overall, we are excited about a strong finish in fiscal 24 and continuing our momentum into the next fiscal year and beyond. As always, I would like to thank our employees, customers, and stockholders for their continued support. With that, I will turn the call back over to Alan to discuss our financial results and guidance in more detail before we open the call to questions. Thank you.

Speaker Change: Right demography screening systems with automated tray return systems, along with our multiyear service and support.

Alan: We also announced a $27 million award from a leading European Airport.

Alan: Provided the itemized buybacks explore.

Deepak Chopra: Explosive trace detection <unk> systems or.

Speaker Change: Our secondary screening of passengers and carry on baggage.

Speaker Change: A side comment.

Alan: <unk> buybacks.

Alan: In addition, our recurring service revenue like other products.

Alan: <unk> also has an ongoing revenue recurring revenue of consumables, which has a very healthy margin.

Alan: And finally, we announced a $4 million award from a leading global air cargo logistics customer.

Alan I. Edrick: Thank you, Deepak. Now, I will review in greater detail the financial results for our third quarter. Again, our fiscal 24 Q3 revenues were up 34% compared with revenues in the third quarter of the prior fiscal year. The 60 percent year-over-year increase in Q3 security division revenues was largely the result of sales growth of our cargo and vehicle inspection products. We also had double-digit percentage revenue growth in our aviation and checkpoint products and related services.

Alan I. Edrick: You'll provide various screening systems.

Alan I. Edrick: Including the <unk> safety base explosive detection system.

Speaker Change: <unk> 9007, Dx and the 937 Dx for large packaged screening.

Alan I. Edrick: In the 920 <unk> smaller packages.

Speaker Change: As you can see from the different projects mentioned.

Speaker Change: It helps to have a broad portfolio.

Alan I. Edrick: Q3 revenues included continued shipments from the $200 million plus cargo contract announced in January of 2023 and significant revenues from the $500 million plus cargo contract announced in March of 2023. However, third party opto sales were down approximately 3% year over year.

Alan I. Edrick: We are proud to say that we have the broadest portfolio compared to our competitors and utilizing this feature and technology variations to provide optimized solutions for customers.

Speaker Change: We have seen over the last few quarters that airports and air cargo customers are.

Speaker Change: Are making significant security infrastructure and investments and our business has benefit and we believe that this trend will continue into fiscal 'twenty five and beyond.

Alan I. Edrick: Our turnkey projects in Albania.

Speaker Change: While our model.

Speaker Change: And the European airports have been performing advanced chips.

Speaker Change: Anticipated in addition.

Alan I. Edrick: We are also getting up to begin our latest darn deep ragwort.

Speaker Change: <unk>, which we expect to commence sometime in summer.

Speaker Change: In security, we look to finish strong.

Alan I. Edrick: <unk> bookings activity and a significant opportunity pipeline suggest continued strong growth demand for 2025 and beyond.

Alan I. Edrick: Moving to our optoelectronics and manufacturing division.

Speaker Change: Well, then I'm characteristically softer quarter.

Speaker Change: Which we think is a one off we continue to work with several major customers to sync with the inventory demand forecasts, which has impacted revenues in the short term as we had anticipated the.

Speaker Change: The Opto Division achieved a book to bill exceeding one for the quarter, which bodes well for the business going forward.

Speaker Change: You announced a couple of those key wins.

Alan I. Edrick: Including a 15 million dollar order from a healthcare OEM to provide critical sub assemblies that are used in its innovative and specialized solutions.

Alan I. Edrick: Our gross margin will generally fluctuate from period to period based on revenue, mix, and volume, inflation, and the impact of changes in supply chain costs, among other factors. Moving on to Operating Expenses. We continue to work diligently across each of our divisions to improve efficiency and to prudently manage our SG&A cost structure. Q3 SG&A expenses were $66.6 million, or 16.4% of sales, compared to 17.7% of sales in Q3 of the prior year.

Alan I. Edrick: We also announced a $3 million award from a major defense electronics Oems.

Alan I. Edrick: <unk> sensors for advanced missile systems.

Alan I. Edrick: During Q3.

Speaker Change: Began introducing prospective customers who are new operation in Mexico. The Cod date, which has given us significant capacity to help customers aspiring to shift work from Asia the near shore.

Larry Solow: Looking ahead, we expect after the restart of <unk>.

Alan I. Edrick: In Q4 and believe the division is well positioned for fiscal 'twenty five as the inventory right sizing winds down with many of our customers.

Alan I. Edrick: The year over year increase in absolute costs was driven by higher compensation, including incentive compensation linked to our significant sales growth, increased professional fees, and unfavorable FX, among other items. Research and development expenses in Q3 of fiscal 24 were $17.1 million, or 4.2% of sales, compared to $14.9 million, or 4.9% of sales in the same prior year quarter. We continue to dedicate considerable resources to R&D, particularly in our security and healthcare segments, as we remain focused on innovative product development, which we view as vital to the long-term success of our businesses. We re-recorded $1 million of restructuring and other charges in Q3 of Fiscal 24.

Alan I. Edrick: Finally, moving onto the healthcare division.

Operator: Revenues were approximately 6% lower than in the prior year's Q3.

Alan I. Edrick: This division.

Speaker Change: Continues to work through a challenging hospital capex environment despite that.

Alan I. Edrick: Healthcare had an active bookings quarter just before quarter end, we won a 6 million dollar order from a U S based hospital.

Alan I. Edrick: When a patient monitoring systems, including exhibit central stations expression patient monitors and Gil patient monitors, which we expect to begin delivering in Q4.

Alan I. Edrick: Patient monitoring solutions allow.

Alan I. Edrick: Customers will enhance their services by integrating features like the safe and sound digital health platform and mobile App. This addition enables real time patient monitoring services. Additionally, customers can elaborate that augment and predictive analytic software <unk>.

Alan I. Edrick: SaaS advanced health analytics further augmenting our comprehensive monitoring offerings.

Alan I. Edrick: We continue to invest heavily in developing new products, primarily in our next generation platform for patient monitoring products and solutions.

Alan I. Edrick: Overall, we are excited about our strong finish in fiscal 'twenty, four and continuing our momentum into the next fiscal year and beyond as always I would like to thank our employees customers and stockholders.

Speaker Change: Continued support with that.

Alan I. Edrick: On the call back over to Alan to discuss our financial results and guidance in more detail before we open it for questions. Thank you.

Speaker Change: Thank you Deepak.

Speaker Change: Now I will review in greater detail the financial results for our third quarter.

Alan I. Edrick: Again, our fiscal 'twenty four Q3 revenues were up 34% compared with revenues in the third quarter of the prior fiscal year.

Alan I. Edrick: In Q3 of each of fiscal 24 and 23, we recognize immaterial amounts of discrete tax items. Excluding the impact of discrete tax items, our normalized non-GAAP effective tax rate in Q3 fiscal 24 was 23.0% compared to a normalized effective tax rate of 23.2% in Q3 of fiscal 23. I will now turn to a discussion of our non-GAAP adjusted operating margin. Overall, our adjusted operating margin in the third quarter of fiscal 24 increased to 13.9% from 12.9% in Q3 of fiscal 23, driven by the strong performance of the Security Division.

Alan I. Edrick: The 60% year over year increase in Q3 Security Division revenues was largely the result of sales growth of our cargo and vehicle inspection products.

Alan I. Edrick: We also had double digit percentage revenue growth in our aviation and checkpoint products and related services.

Alan I. Edrick: Third party auto sales were down approximately 3% year over year.

Alan I. Edrick: As mentioned on last quarter's call, we anticipated that with certain after customers adjusting inventory levels and ordering patterns.

Alan I. Edrick: Revenues in this division will continue to be impacted over the short term and that has indeed been the case.

Alan I. Edrick: As Deepak mentioned, we see this improving going forward.

Alan I. Edrick: Health care Division sales decreased 6% year over year in this challenging hospital capex environment.

Alan I. Edrick: The fiscal 'twenty four Q3 gross margin of 33, 6% was down from the 34, 3% gross margin in Q3 last year.

Alan I. Edrick: This was largely due to the mix of revenues.

Alan I. Edrick: As our Q3 growth. This year was driven by a significant increase in product revenues, which carry a less favorable margin than service revenues.

Alan I. Edrick: In a less favorable mix of service revenues in the quarter as well.

Alan I. Edrick: Thus, while the gross margin on product sales increased the gross margin on service revenues decreased year over year.

Alan I. Edrick: We anticipate a sequential improvement in this division as we finish out Fiscal 24. However, the healthcare division's adjusted operating margin was negligible, given the reduction in the division's sales. Moving to cash flow, we invested significant amounts in working capital associated with the company's strong growth. In Q3, cash use in operations was $52 million, primarily due to increases in accounts receivable associated with the Security Division revenue growth. CapEx in Q3 of Fiscal 24 was $4.9 million, while depreciation and amortization expense was $10.6 million.

Alan I. Edrick: 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.

Alan I. Edrick: Moving to operating expenses.

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

Alan I. Edrick: Q3, SG&A expenses were $66 6 million or 16, 4% of sales compared to 17, 7% of sales in Q3 of the prior year.

Alan I. Edrick: The year over year increase in absolute cost was driven by higher compensation, including incentive compensation linked to our significant sales growth increased professional.

Alan I. Edrick: Our balance sheet is solid, with modest net leverage of 1.5. Aside from $7.5 million of annual or required principal payments under our bank term loan, the bulk of our debt matures in fiscal 27. And finally, let's turn to guidance. We are increasing our non-GAP diluted EPS guidance to growth of over 30% for earnings per share over fiscal 23, while maintaining our revenue guidance of an increase of more than 19 percent. This fiscal 24 non-GAAP diluted EPS guidance excludes potential impairment, restructuring, and other charges, including amortization of Acquired Intangible Assets and Non-Cash Interest Expense and their Associated Tax Effects, as well as discrete tax and other non-recurring items.

Alan I. Edrick: Professional fees and.

Alan I. Edrick: An unfavorable FX among other items.

Alan I. Edrick: Research and development expenses in Q3 of fiscal 'twenty four were $17 1 million.

Alan I. Edrick: Or four 2% of sales comp.

Alan I. Edrick: Compared to $14 9 million.

Alan I. Edrick: Our four 9% of sales in the same prior year quarter.

Alan I. Edrick: We recorded $1 million of restructuring and other charges in Q3 of fiscal 'twenty four.

Alan I. Edrick: Moving to interest and taxes.

Alan I. Edrick: Net interest and other expenses in Q3 increased to $7 4 million in fiscal 'twenty four from.

Alan I. Edrick: From $5 7 million in fiscal 'twenty three.

Alan I. Edrick: Primarily due to increased interest rates on a higher level of borrowings.

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

Alan I. Edrick: Our reported effective tax rate under GAAP was 22, 6% in Q3 of <unk>.

Alan I. Edrick: Fiscal 'twenty four compared to 23, 8% in Q3 of fiscal 'twenty three.

Alan I. Edrick: In Q3 of each of fiscal 'twenty, four and 'twenty three we recognized immaterial amounts of discrete tax items.

Alan I. Edrick: Excluding the impact of discrete tax items, our normalized non-GAAP effective tax rate in Q3 fiscal 'twenty four.

Alan I. Edrick: Was 23.0% compared to a normalized effective tax rate of 23, 2% in Q3 of fiscal 'twenty three.

Alan I. Edrick: I will now turn to a discussion of our non-GAAP adjusted operating margin.

Alan I. Edrick: Overall.

Alan I. Edrick: Our adjusted operating margin in the third quarter of fiscal 'twenty four increased to 13, 9% from 12, 9% in Q3 of fiscal 'twenty three.

Alan I. Edrick: We continue to remain focused on the growth of our businesses. We believe our efforts will enable OSI to continue providing innovative products and solutions. We would like to take this opportunity to, again, thank the global OSI team for its continued dedication to supporting our customers and partners. And at this time, we'd like to open the call to questions. Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.

Alan I. Edrick: Driven by the strong performance of the security Division.

Alan I. Edrick: The non-GAAP adjusted operating margin in the security Division expanded to 18, 6%.

Alan I. Edrick: In Q3 of fiscal 'twenty four from 18, 3% in Q3 of 'twenty, three primarily driven by higher product revenues.

Alan I. Edrick: The adjusted operating margin in our Opto Division decreased to 12, 2% in the third quarter of fiscal 'twenty four from 14, 1% in last year's comparable quarter due to lower sales and a less favorable product mix.

Alan I. Edrick: We anticipate a sequential improvement in this division as we finish out fiscal 'twenty four.

Alan I. Edrick: The healthcare division's adjusted operating margin was negligible given the reduction in the division sales.

Alan I. Edrick: Moving to cash flow.

Alan I. Edrick: We invested significant amounts in working capital associated with the Companys strong growth.

Operator: One moment while we compile our Q&A roster. Our first question is going to come from the line of Josh Nichols with B Riley. Your line is open. Please go ahead.

Josh Nichols: In Q3 cash used in operations was $52 million.

Operator: Primarily due to increases in accounts receivable associated with the security Division revenue growth.

Josh Nichols: Capex in Q3 of fiscal 24 was $4 9 million, while depreciation and amortization expense was $10 6 million.

Josh Nichols: Thanks for taking my question and great to see the backlog holding near these record levels, despite the big conversion. I thought most people would have expected to see a little bit of a decline. I'm just kind of curious; could you contextualize this?

Alan I. Edrick: Our balance sheet is solid with modest net leverage of one five.

Josh Nichols: Aside from $75 million of annual required principal payments under our bank term loan.

The bulk of our debt matures in fiscal 'twenty seven.

Josh Nichols: And finally, let's turn to guidance.

Josh Nichols: We are increasing our non-GAAP diluted EPS guidance to growth of over 30%.

Alan I. Edrick: Earnings per share from fiscal <unk> over fiscal 'twenty three while.

Speaker Change: While maintaining our revenue guidance of an increase of more than 19%.

Alan: But 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.

Alan: We currently believe this guidance reflects reasonable estimates.

Speaker Change: The actual impact on the company's financial results of timing changes on the expected conversion of backlog to 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 I. Edrick: Actual results in non-GAAP earnings per share it could vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings.

Josh Nichols: And then good to hear that it sounds like the inventory right-size in the opto electronic space is effectively behind the company looking for some sequential improvement in fiscal 4Q. Looking at the healthcare division, though, I know it's not a very big percentage of revenue, but it's been a little bit of a headwind and typically it's higher margin contribution. When looking at 4Q, that's usually a pretty strong quarter for healthcare. I guess any type of guidance that you can provide for what you're expecting for the fourth quarter in healthcare. Josh, I'll give you a little color there, and Deepak can add more.

Josh Nichols: We continue to remain focused on the growth of our businesses.

Josh Nichols: We believe our efforts will enable OSI to continue providing innovative products and solutions.

Speaker Change: We would like to take this opportunity to again, thank the global OSI team.

Josh Nichols: It's continued dedication in supporting our customers and partners.

Speaker Change: And at this time, we'd like to open the call to questions.

Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment, while we compile our Q&A roster.

Josh Nichols: Our first question is can it comes from the line of Josh Nichols with B Riley. Your line is open. Please go ahead.

Speaker Change: Thanks for taking my question and great to see the backlog holding near these record level.

Alan I. Edrick: Though we don't provide guidance by division, as you recall, Q4 of last fiscal year was an extremely strong quarter for our healthcare division, aided by a significant booking that we had received in Q3 and then shipped in Q4. So it provides a pretty tough comp that we will improve sequentially in our healthcare revenues over Q3, but we won't be at the level we were at in Q4 of last year.

Alan I. Edrick: Levels, despite the big conversion.

Speaker Change: I thought most people would have expected to see a little bit of a decline I am just kind of curious could you contextualize. This I know youre not giving guidance for next fiscal year, but of that $1 $8 billion backlog you have right now around how much of that is going to be recognized next fiscal year.

Alan I. Edrick: Josh This is Alan and thanks for the question.

Speaker Change: And good question.

Alan I. Edrick: We don't provide necessarily guidance on the rollout of our backlog from a year to year perspective, we could we would say that we do see a significant.

Josh Nichols: And then last question for me. I mean, I know that there was a significant bump in the accounts receivable, but I guess is that like subsequently been collected and expectations for pre cash flow? fiscal fourth quarter. Sure, yeah, good question. You know, clearly, big investments in working capital receivables are up significantly with the heavy growth that we had in our security division. We have collected a nice amount of cash since March 31st, as we sit here today, and expect to collect a significant amount of cash through the balance of the quarter as well. However, we think the real turning point for generating real strong cash flow is fiscal 25.

Josh Nichols: Portion of that backlog will be recognized in fiscal 'twenty five therefore with a couple of months before the start of our new fiscal year. We believe we have very strong visibility.

Josh Nichols: Into next year already at this time not to mention all the bookings that will we will tend to get here in Q4 as well before we start fiscal 'twenty five so it really places us in a nice position and it gives us a great deal of confidence for for next year.

Speaker Change: Great and then good to hear that it sounds like the inventory right sizing in the Opto electronics space is effectively behind the company looking for some sequential improvement in fiscal <unk>.

Josh Nichols: Looking at the healthcare Division, though I know, it's not a very big percentage of revenue but.

Josh Nichols: It's been a little bit of a headwind and typically has higher margin contribution when looking at <unk>, that's usually a pretty strong quarter for healthcare I guess any type of guidance. You can provide for you are expecting for the fourth quarter for healthcare.

Alan I. Edrick: So this has been a year of heavy investment in both inventory and receivables. And while we expect to continue growing at 25, we think we can start to see a little bit of a reverse course on the big investment in those two areas to really drive some nice cash flow next year. Well, I'm looking forward to seeing and hearing about it. I'll hop back in the queue.

Speaker Change: Josh I'll give you a little color there and if I can add on.

Speaker Change: We don't provide guidance by division as you recall Q4 of last fiscal year was an extremely strong quarter for our health care Division.

Alan I. Edrick: Added by a significant booking that we had received in Q3 and then shipped in Q4. So it provides a pretty tough comp embedded in the guidance that we're providing for OSI systems overall for fiscal 'twenty four.

Operator: Suggests.

Operator: That.

Lawrence Scott Solow: We will improve sequentially in our healthcare revenues over Q3, but we won't be at the level. We were at in Q4 of last year.

Speaker Change: Got it and then last question for me I mean.

Lawrence Scott Solow: I know that there was a significant bump in the accounts receivable, but I guess is that like subsequently been.

Lawrence Scott Solow: Collected in expectations for free cash flow in.

Lawrence Scott Solow: Fiscal fourth quarter.

Speaker Change: Sure Yes, good question.

Lawrence Scott Solow: Nearly big investments in working capital receivables are up significantly with the with the heavy growth that we had in our security Division.

Lawrence Scott Solow: And you mentioned DPACs or pipeline opportunities. You could just kind of help us give a little more color there, just, you know, how strong that pipeline is and, you know, your confidence level, maybe any given quarter, the book-to-bill falling below one, but, you know, just your comfort level and then, over the long run, your book-to-bill remaining above one and you continuing to be able to grow that top line beyond, you know, once these two larger contracts are Good question.

Lawrence Scott Solow: Namely.

Lawrence Scott Solow: We have collected.

Lawrence Scott Solow: Nice amount of cash.

Lawrence Scott Solow: Subsequent to March 31, as we sit here today and expect to collect a significant amount of cash.

Lawrence Scott Solow: Through the balance of the quarter as well. However, we think the real turning point for generating a real strong cash flow is as fiscal 'twenty. Five. So this has been a year of heavy investment in both inventory and receivables and while we expect to continue growing at 25, we think we can start to see a little bit of a reverse course on the other big investment in those two areas.

Lawrence Scott Solow: Yes.

Lawrence Scott Solow: Really drive some nice cash flow next year.

Speaker Change: We're looking forward to seeing and hearing about it I'll hop back in the queue. Thanks.

Speaker Change: Thank you and one moment as we move on to our next question.

Lawrence Scott Solow: And our next question is going to come from the line of Larry Solow.

Brian William Ruttenbur: CJS Securities. Your line is open. Please go ahead.

Speaker Change: Great. Thanks, and good morning, gentlemen, I guess just a question on the on the.

Deepak Chopra: The backlog or the.

Speaker Change: Or I guess my real question is just forward looking so the backlog obviously feels like 25 should be another good year for you guys.

Deepak Chopra: I guess the.

Deepak Chopra: The people.

Deepak Chopra: We'd get better comfort on maybe.

Deepak Chopra: As you look out beyond 'twenty.

Deepak Chopra: You mentioned the impact or the <unk>.

Deepak Chopra: <unk> opportunities.

Speaker Change: Maybe you could just kind of help us give a little more color there.

Deepak Chopra: How strong our pipeline is.

Deepak Chopra: Your confidence level.

Deepak Chopra: Maybe any given quarter the book to bill falling below one but.

Deepak Chopra: Just your comfort level and then over the long run.

Deepak Chopra: Book to Bill remaining above one and you're continuing to be able to grow that topline beyond once these two larger contracts are.

Deepak Chopra: Satisfied over the next couple of years.

Speaker Change: Good question.

Deepak Chopra: We are very very confident.

Deepak Chopra: And feel good about the pipeline of activity is quite strong.

Deepak Chopra: We are entering into the next year with a very strong backlog to begin with.

Deepak Chopra: But more than that I think the important thing to say is that the whole world.

Deepak Chopra: <unk> continues to be more concerned with security all over at the same time as aviation is going up as people do more trade between each country as people are moving from China to other places everywhere you look at it security is an important factor for them.

Lawrence Scott Solow: I guess question for Alan, just on the margin profile and, you know, probably explain some of the sequential kind of drop in margin and security. I know last quarter you had called out that when it was over 22, that that was a little bit of an anomaly on the upside. But just, you know, on the shift down time, this shift down this quarter, it sounds like it's more just a mixed shift, less service revenue and more new product revenue.

Lawrence Scott Solow: And we are very proud to say that we have the broadest product portfolio. We have a very good reputation and the more we do an install and stopped box stuff all over the globe more it looks like to the customers when they do come to the interest to buy something we are definitely invited to the dance. So we definitely.

Lawrence Scott Solow: We have good prospects good pipeline good.

Lawrence Scott Solow: <unk> reputation.

Lawrence Scott Solow: Good product portfolio. So all of those things, we think will be very beneficial for not just 25, but beyond and we continue at the same time invest heavily in innovation and new products.

Lawrence Scott Solow: Just trying to get a little better color over the longer term or even the next couple of years, you know, do you expect margins generally to, in the security division, to go higher? You know, does that, is there any reflection based on where you stand on some of the ramp of these orders? Do the margins get better as, you know, as you sort of complete some, as you, you know, progress with some of these larger orders?

Lawrence Scott Solow: And we really feel very confident this will continue.

Speaker Change: Okay, Great I guess question around.

Lawrence Scott Solow: You mentioned sort of the margin profile and.

Lawrence Scott Solow: Probably explain some of the sequential kind of drop in margin security I know last quarter, you had called out that when it was over 22 that that was a little bit of an anomaly on the upside.

Lawrence Scott Solow: Just on the ship downtime that sit down this quarter. It sounds like it's more just the mix shift.

Lawrence Scott Solow: Less service revenue and more.

Lawrence Scott Solow: Of the new product revenue.

Lawrence Scott Solow: Is there any economies of scale within the orders, or overall, as you get more and more orders? I'm just trying to get a basic kind of little more context on just the margins, short term and more mid to long term.

Lawrence Scott Solow: Just trying to get a little better color.

Lawrence Scott Solow: Over the longer term or even the next couple of years do you expect margins generally.

Lawrence Scott Solow: <unk> vision.

Lawrence Scott Solow: Go higher.

Lawrence Scott Solow: Does that is there any.

Lawrence Scott Solow: Reflection based on where you stand on some of the ramp of these orders.

Lawrence Scott Solow: Our margins the margins get better as is <unk>.

Alan I. Edrick: Sort of complete.

Alan I. Edrick: Progress with some of these larger orders.

Speaker Change: Is there any economies of scale.

Speaker Change: The orders or overall as you get more and more orders I'm, just trying to get a basic kind of little more context on just the margin.

Alan I. Edrick: Short term and more mid to longer term outlook.

Alan I. Edrick: Sure Larry Good question. This is Alan Thank you.

Alan I. Edrick: Our goal is always to couple of topline growth with margin expansion and I think we've been able to do that.

Alan I. Edrick: Historically on a on a year over year basis quite regularly certain quarters based upon the mix of revenues by the product by the customer.

Alan I. Edrick: May shift margins around a bit but as we look forward. Our goal is to continue to expand our operating margins in the security division on a on an annual basis and when we look out not just what's in our backlog, but the pipeline of opportunities expanding out into 'twenty six 'twenty $7 28, we think there's ample opportunity to do that given the strong <unk>.

Alan I. Edrick: Backlog that we have right now and as Deepak alluded to with great confidence in 25, where at this point, we're already beginning to fulfill.

Lawrence Scott Solow: So we're really focused on a lot of those years, and we think there's margin potential in all of those. And just like, if I look at Mexico, the Sedana contract in particular, because that's a big one, obviously, probably makes up still a quarter of your backlog or something like that. Does the margin on that, you know, change, like, as you progress?

Lawrence Scott Solow: Things in in 'twenty, six and even into 2007. So we're really we're really focused on on a lot of those out years and we think there is a margin potential in all of those.

Lawrence Scott Solow: Just like if I look at Mexico today on a contract in particular, because that's the big one obviously, probably makes up Scott quarter of your backlog or something like that.

Lawrence Scott Solow: What is.

Lawrence Scott Solow: Is the margin on that.

Lawrence Scott Solow: It seems like as you progressed I imagine beyond that $500 million service component, which is probably.

Lawrence Scott Solow: Maybe you can give us some color on what percentage of that will be but as a percent of how much revenue that will be annually, but I imagine that march there'll be a lot better too, but does that margin also improve like the back half get better do you get better at it is there any difference in margin.

Larry: As you fulfill that contract.

Alan I. Edrick: So Larry so the contract that you're referring to consist of multiple different products as well as service. So the margin will differ a little bit depending upon the products and the mix of products that we're fulfilling in a particular quarter.

Speaker Change: Our team is actually doing an outstanding job on that.

Alan I. Edrick: But you're right, as we move into the service element, service generally carries a higher margin than our product revenue. And we would expect that to be the case here too. So as we start getting those annual recurring revenues from service post-warranty, then that will be nicely margin-accretive to us as well. But it's been a very nice contract for us. Okay, great. I appreciate the call.

Speaker Change: But youre right as we move into the service element service generally carries a higher margin than our than our product revenue and we would expect that to be the case here too. So as we start getting those annual recurring revenues from service.

Alan I. Edrick: <unk> warranty.

Alan I. Edrick: And then that will be nicely margin accretive to us as well, but it's been a very nice contract for us.

Speaker Change: Got it okay, great I appreciate the color thanks, guys.

Lawrence Scott Solow: Thank you, and one moment as we move on to our next question. And our next question is going to come from the line of Jeff Martin with Roth MKM. Your line is open. Please go ahead.

Jeffrey Michael Martin: Thank you and one moment as we move onto our next question.

Lawrence Scott Solow: Okay.

Lawrence Scott Solow: And our next question is going to come from the line of Jeff Martin with Roth <unk> your.

Jeffrey Michael Martin: Your line is open. Please go ahead.

Jeffrey Michael Martin: Thank you. And hello, Deepak and Alan. I wanted to dive in, you know, obviously, Cargo and Vehicle Inspection in the International Market. Huge opportunity for you. Still not a mature market. I was curious if you could just comment with respect to that and also kind of lay out how you see OSI coming up, positioned competitively relative to the other providers that you see out there. This is Deepak here.

Jeffrey Michael Martin: Thank you and Hello, Deepak and Alan.

Deepak Chopra: Wanted to dive in obviously.

Jeffrey Michael Martin: Cargo and vehicle inspection and the international markets.

Deepak Chopra: And a huge opportunity for us still not a mature market I was curious if you could just comment with respect to that.

Deepak Chopra: And also kind of lay out how you see OSI.

Jeffrey Michael Martin: Position competitively relative to the other providers that you see out there.

Jeffrey Michael Martin: Okay.

Deepak Chopra: This is deepak here.

Deepak Chopra: Uh, you know, we feel good about it. I've said it before. We are proud to say that we have the broadest product portfolio compared to our competitors. Also, we can also say that, especially in the cargo and solutions area, space. We can now proudly say that we are number one. So, as you get larger, as your product line gets more accepted, as you get a broader reach in the world, and get with a good reputation, you continue to draw more attraction and preferential from customers. Because no country is going to put millions of dollars at stake with any vendor unless it's tried and has a good reputation.

Deepak Chopra: We feel good about it I've said it before that.

Deepak Chopra: We are proud to say that we have the broadest product portfolio compared to our competitors.

Deepak Chopra: So we can also say that especially in the cargo and solutions space.

Deepak Chopra: Our space.

Deepak Chopra: We now can say proudly that game number one.

Deepak Chopra: So as you get larger as Yo Yo product line gets more accepted as you get more broader reach in the world and getting a good reputation.

Deepak Chopra: Continue to draw more traction and perhaps potential from the customers because no country is going to put millions of dollars at stake for any vendor unless it's tried and have a good reputation.

Deepak Chopra: So we are quite happy with what we are doing. We are very much focused at the same time to continue to do better. The team is doing a marvelous job.

Deepak Chopra: So we are quite happy with what we are doing we are very much focused at the same time to continue to do better.

Deepak Chopra: Team is doing a marvelous job.

Deepak Chopra: While we keep talking about cargo yogurt your question about cargo, but even in the aviation space.

Deepak Chopra: Some great successes.

Deepak Chopra: We have a very good product line, we continue to look at our broader product line and we think that as aviation traffic improves that will continue.

Deepak Chopra: And not to forget the thing that most people ignored that the air cargo space continues to grow and that's also very good and we have the largest installed base even in that space. So all in all.

Deepak Chopra: And we have the largest installed base, even in that space. So all in all, we think that we are well-suited to not just domestically, but internationally. And we continue to look at it, and be focused, and work with the customers, and listen to the customers about what they want. Great.

Speaker Change: That's great.

Deepak Chopra: Deepak, could you comment, or maybe Alan, on an update on what you think might happen with potential follow-on orders from the U.S. Customs and Border Protection. Well, you know, obviously, we have those two big IDIQs. And now that the budgets have been settled there, we are looking forward to them. And we think that for the next year or so or even more, there'll be more requirements. And again, like I said, we are well-placed.

Deepak Chopra: Deepak could you comment maybe on an update what you think might happen with us.

Deepak Chopra: And to follow on orders from the U S.

Deepak Chopra: And from Dawn patrol.

Deepak Chopra: Well.

Deepak Chopra: But obviously, we have those two big idea iqs.

Deepak Chopra: And now that the.

Deepak Chopra: Budgets have been settled there.

Deepak Chopra: We are looking forward to it and we think that for the next.

Deepak Chopra: Year are solid even more there'll be more requirement and again like I said, we are well placed and we think that going into fiscal 'twenty five there'll be a lot more activity.

Deepak Chopra: And we think that going into fiscal 25, there will be a lot more activity. So, all in all, not just the Border Patrol, but the State Department, DOD, and as we mentioned in the last conference call, yes, it's unfortunate for all the international events that are happening in Ukraine, around that area, the Middle East and stuff, but as they settle down, there's going to be much more requirement for security equipment to protect the Western Allies people, and we again think that the government will finance it, and we are well placed for And finally, how are you thinking about capital allocation next year because you're going to be generating significant free cash flow as that working capital investment flips into cash? Jeff, this is Alan here.

Alan: All in all not just to the border patrol, but state Department Dod.

Alan: And as we mentioned in the last conference call.

Alan: Yes, just unfortunate for all the international events that are happening in Ukraine around that area of the middle east and stuff, but as they settle down.

Alan: There's going to be much more requirement for security equipment to protect the western allies people and we again think that the government will finance it and we are well placed for it.

Alan: Makes sense.

Deepak Chopra: Finally.

Alan: How are you thinking about capital allocation next year, because you're going to be generating significant free cash flow as that working capital investment flips into into cash generation.

Alan I. Edrick: Yes, from a capital allocation perspective, we principally look at three areas, and we don't necessarily look at them as mutually exclusive. We can often do all three. We expect to grow nicely organically, but we always look to supplement that with strategic M&A as well, so some of the cash flow could very well go to some acquisition targets. Stock buyback is something we've historically been very active in, not as much this year as we've been investing so much in working capital, and then any residual cash that we have, we would use to pay down our borrowing. Thank you.

Alan I. Edrick: We expect to grow nicely organically, but we always look to supplement that with strategic M&A as well. So some of the cash flow could very well go to some some acquisition targets.

Alan I. Edrick: We would use to pay down our borrowings.

Speaker Change: Thank you.

Operator: And before we take our next question, ladies and gentlemen, if you do wish to ask a question at this time, please press star 11 on your telephone. And our next question is going to come from the line of Christopher Glynn with Oppenheimer & Co. Your line is open, please go ahead.

Alan I. Edrick: And before we take our next question, ladies and gentlemen, if you do wish to ask a question at this time. Please press star one on your telephone.

Operator: And our next question is going to come from the line of Christopher Glynn with Oppenheimer <unk> Co. Your line is open. Please go ahead.

Speaker Change: Hi, Thanks.

Christopher D. Glynn: Just wanted to.

Christopher D. Glynn: Sort of asking supply chain question, a bit as pertains to gross margin you talked about the gross margin year over year mix dynamics I'm curious.

Christopher D. Glynn: It was 60% security growth how is that supply chain performing you've seen.

Christopher D. Glynn: Variability around expediting costs just curious.

Christopher D. Glynn: If there was any material variability sequentially on supply chain or if that sequential bridge in gross margin was was really just the mix dynamics as well.

Speaker Change: Very good question.

Christopher D. Glynn: Excuse me.

Deepak Chopra: Definitely, as you ramp up so fast. The supply chain is a challenge. We have good contacts, we've done well, we've managed it well, and our ability to be global, even in our manufacturing, has helped us very much. But the challenges are there, but we think that we have been successful in managing it well, and uh, some of those big things that were a couple of quarters ago at post-covid of the cost prices, the freight, and stuff that are stabilized. And we think that going forward. We have it under control, and we can manage it well. Alan, do you want to add something?

Christopher D. Glynn: And definitely as you ramp up so fast.

Alan: Supply chain is a challenge.

Alan: We have good context, we've done well, we manage it well.

Alan: And our.

Alan: You need to be global even in our manufacturing has helped us very much.

Alan: But the challenges out there, but we think that we have been successful in managing it well.

Deepak Chopra: And.

Alan: Some of those big things that were a couple of quarters at post Covid.

Alan: After cost prices, the freight and stuff that has stabilized.

Alan: And we think that going forward.

Alan: We have it under control and we can manage it well.

Deepak Chopra: Alan do you want to add something sure and create some of the changes you see in gross margin for OSI overall year over year and sequentially is really a function of product versus service with these two large contracts right now, we're delivering substantial product revenue growth and the product revenues.

Alan I. Edrick: Sure. And Chris, some of the changes you see in gross margin, you know, for OSI overall, year over year and sequentially, are really a function of product versus service. You know, with these two large contracts right now, we're delivering substantial product revenue growth, and the product revenues inherently carry a lower gross margin than service. So as a result, when we consolidate the whole thing, our gross margin would be impacted by that

Alan I. Edrick: We carry a lower gross margin than service. So as a result, when we consolidate the whole thing our gross margin.

Alan I. Edrick: Would be impacted by that once we finish delivering these products and it becomes.

Alan I. Edrick: Once we finish delivering these products, then it becomes... added service revenue, that's really an opportunity to enhance the gross margin overall. But that being said, even where there may be a little dip in the gross margin because of higher product-related revenues, it still is a very nice contribution to the operating margin.

Alan I. Edrick: Nice contribution to the operating margins.

Alan I. Edrick: Thanks, and follow-up on the O&M segment. I guess the declines in external sales aren't that... really extreme, given we're in a lead time and inventory correction period, and you sound pretty constructive going forward. I'm just curious if you could talk a little bit more about that visibility, how much is tied to direct specifications, and are there any verticals like defense or medical or whatever you want to provide in terms of where you see the thrust picking back up for opt-out. Good question.

Speaker Change: Thanks Anna.

Alan I. Edrick: Follow ups on O&M segment.

Alan I. Edrick: I guess the.

Alan I. Edrick: Declines on the external sales arent that.

Alan I. Edrick: Really extreme given.

Alan I. Edrick: We're in the lead time and inventory correction period.

Alan I. Edrick: Sound pretty constructive going forward.

Alan I. Edrick: I'm just curious if you could talk a little bit more about.

Alan I. Edrick: That visibility how.

Alan I. Edrick: How much is tied to direct specifications, there any verticals like defense or medical.

Alan I. Edrick: Or whatever you want to provide in terms of.

Alan I. Edrick: Where you see the trust picking back up for <unk>.

Alan I. Edrick: Good question.

Deepak Chopra: Firstly, I mean, we did say on the call that the Book Bull Bill wasn't one for the Opto group. That shows that we think there's more stability going forward, and we'll get back on track. Most of the segments are, we think, are going to get back to normal with the inventory adjustment. Consumer products might be a little bit behind, but as the, especially as the budgets get passed, as the stuff keeps happening with the aid to Ukraine and Israel and stuff, the aerospace defense business will then start picking up again.

Alan I. Edrick: I mean, we did say on our call.

Deepak Chopra: <unk>.

Deepak Chopra: Book to Bill was one one for the Opto group.

Deepak Chopra: That shows that we think there is more stability going forward.

Deepak Chopra: And we'll get back on track.

Deepak Chopra: The segments.

Deepak Chopra: We think are going to get back to normal the debt inventory adjustment.

Deepak Chopra: Consumer products might be a little bit behind.

Deepak Chopra: As especially as the budgets get bashed has the stuff keeps happening with the aid to Ukraine, and Israel and stuff.

Deepak Chopra: The aerospace defense business.

Deepak Chopra: Then start picking up again.

Deepak Chopra: We are well designed into it. The automotive industry is up there, and we supply to that. Our medical industry, though there is a lot of, you know, tension on the capex in the hospital market, but there is still a lot of need for what I call devices and those kind of consumables, and we supply products for that. So we think overall, all the segments will do well. One of the good things we can proudly say is that we are not dependent on any one segment. We are a very broad segment based company, and we think that overall, the business is going to start growing. Alan

Deepak Chopra: Well designed into it.

Deepak Chopra: The automotive industry is up there and we supply to that our medical industry, though data is a lot of.

Deepak Chopra: The tension on the Capex and the more hospital market, but there is still a lot of need for what I call devices and.

Deepak Chopra: What kind of things because it will help us and we supply products for that so we think overall.

Deepak Chopra: All the segments will do well one of the good things. We can proudly say we are not dependent on any one segment. We are very broad segment based and we think that overall the business is going to start growing Alan.

Alan I. Edrick: Yeah, I think that's the case, and I think you're right, Chris. You know, the third-party sales reduction in light of some of the corrections on inventory levels from some of our customers was somewhat modest. And while that may continue a little bit more into Q4, we do expect to see a nice sequential improvement in revenues overall. And we are seeing that across the spectrum.

Alan: Yes, I think Thats I think thats, the case and I think you're right Chris.

Christopher D. Glynn: You know, we're quite diversified between industrial, medical, defense, and automotive technology companies, as Deepak was mentioning. So we are highly encouraged that we'll see a nice pickup here in Q4 over Q3. Great, thanks to the caller. Thank you, and I'm showing no further questions at this time, and I would like to hand the conference back to Deepak Chopra for closing remarks. Thank you once again for attending our conference call. We look forward to speaking with you on the next year-end call in August. Thank you to everybody, our employees, and to our investors, stockholders, and our customers. Thank you very much. This concludes today's conference call. Thank you for participating. You may now disconnect.

Christopher D. Glynn: We're quite diversified between.

Christopher D. Glynn: Between industrial medical defense and automotive technology companies like like Deepak was mentioning so.

Christopher D. Glynn: We're highly encouraged that we'll see a nice pick up here in Q4 over Q3.

Christopher D. Glynn: Great. Thanks for the color.

Christopher D. Glynn: Thank you and I'm showing no further questions at this time and I would like to hand, the conference back to Deepak Chopra for closing remarks.

Christopher D. Glynn: Thank you once again for attending our conference call. We look forward to speaking with you over the next year end call in August.

Christopher D. Glynn: Thank you to everybody our employees.

Christopher D. Glynn: And to our investors stockholders and our customers. Thank you very much.

Christopher D. Glynn: This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2024 OSI Systems Inc Earnings Call

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