OSI Systems, Inc.

Good day, and thank you for standing by. Welcome to the OSI Systems Inc. 3rd Quarter 2022 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 and then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star and then 0. I would now like to hand the conference over to your speaker today, Alan Edrick, Chief Financial Officer, please go ahead.

Well, thank you. Good afternoon, 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, our President and CEO. Welcome to the OSI Systems Fiscal 22 Third Quarter Conference Call. We are pleased that you can join us as we review our financial and operational highlights. Earlier today, We issued a press release announcing our third quarter fiscal year 22 financial results. Before we discuss our Q3 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. 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. For information regarding non-GAAP measures and GAAP measures of the company's results and a quantitative reconciliation of those figures, please refer to today's earnings release. I will begin with a discussion of our financial performance for the third quarter of fiscal 22 and then turn the call over to Deepak for an overview of our business performance. I will then finish with more detail regarding our financial results and a discussion of our outlook for the full year of fiscal 22. We are pleased with our results this quarter. Despite global marketplace challenges, including increasing supply chain delays and logistics costs, and geopolitical events. As we work through this environment, we continue to prioritize delivering on commitments to our customers and to our partners, positioning the company for long-term success, and ensuring the safety of our employees. Now we will go through a high-level summary of our financial results. Q3 revenues of $290 million represent a 2% year-over-year increase, driven by growth in security and opto sales which were partially offset by an expected small reduction in year-over-year healthcare division sales. Q3 non-GAAP earnings per share were $1.43, up 4% from Q3 of fiscal 21, driven by a lower tax rate and smaller share count, which outweighed increased R&D, higher supply chain costs, and a less favorable product mix. Bookings were solid, with a Q3 book-to-bill ratio of 1.1, We ended the quarter with a near record backlog of over $1.2 billion, representing a 14% increase since the end of the last fiscal year. Operating cash flow for the third quarter was strong, as we generated approximately $38 million, while CapEx was approximately $3 million. Finally, we were active with strategic transactions this past quarter, as we acquired two small security companies, and unlock significant value in certain corporate-owned real estate through a sale-leaseback transaction. We also spent approximately $51 million in our share repurchase program. Before diving more deeply into our financial results, I will turn the call over to Deepak.

Thank you, Alan. And again, good afternoon and welcome to the OSI Systems Earnings Call for the third quarter of fiscal 2022. We are pleased with our third quarter results where we achieved solid profitability and strong cash flow on slightly higher revenues from the prior year. The overall bookings continue to be robust and strong as we ended Q3 with a backlog of $1.2 million approximately. Going into our third quarter highlights in each division, and then I'll turn it back over to Alan to provide further detail on our deep financial performance. starting with security where revenues grew 5% from the prior year, despite facing the challenges that Alan mentioned from the global supply chain and logistics and travel constraints that continue as we speak even today. During the quarter, we continued to strengthen our offerings to the marketplace as we made two small strategic acquisitions which are consistent with our focus on increasing the service and software portion of our recurring revenue base. We acquired a longstanding international distributor in a key European region that we believe has many growth opportunities for our solutions, including establishing a direct local sales service and support footprint. We took a similar approach in another region a few years ago, in which we have seen a marked increase in sales since their acquisition. We also acquired a US-based company called Gatekeeper, which provides intelligent optical inspection and recognition solutions to identify threats and provide real-time actionable intelligence. These solutions are utilized for border crossings and checkpoints at critical infrastructure worldwide. The Gatekeeper acquisition expands our hardware offering, while its proprietary software used for the integration of third-party solutions, for example, in vehicle identification, facial recognition, and container tracking, complements the capabilities of our CertScan software platform. our integration software for cargo and vehicle inspection at checkpoints and border crossings. As we have mentioned before, we are excited about the traction we are gaining with our search scan software as a service or SAS model with potential customers. Over the last few years, we have made a concerted effort to grow our revenues from systems integration, software, and ongoing service and support. These complimentary offerings are included in many of our proposals and provide a more steady stream of revenues over the life of the program as compared to a traditional standalone inspection hardware sale. Moreover, higher recurring revenue contribution from software such as search scan operator and maintenance training modules and automated image analysis logarithms has the potential to significantly enhance the overall margins in this division. In addition to making acquisitions like Gatekeeper, which brings new vehicle and passenger ID checkpoint software, we are making significant R&D investments to further enhance our overall software solution offering and security. During the quarter, We made progress on our ongoing major programs, including the one with US Customs and Border Protection, CBP, where we are in various stages of supporting the enhancement of the US border security infrastructure utilizing our cargo and vehicle scanning platforms with X-ray based technologies. In addition to the hardware, search scan and the offerings from gatekeeper are included in the solution for some of these efforts at CBP. We believe that this will continue to grow as CBP continues to expand this approach at various border crossings on the southern border with Mexico. As you might have heard, there are ongoing discussions in Washington DC to get to 100% inspection at the southern border with Mexico. As you might have heard, as an example of the importance of our solutions in helping protect borders and preventing the movement of illegal drugs and contraband, CBP recently announced a significant drug seizure at a border crossing near Laredo, Texas. Multiple screening methods and technologies were used to find the meths hidden inside a truck's trailer that was also carrying food packages. We are truly proud of our contribution in helping secure U.S. borders. Our turnkey programs in Albania, Puerto Rico, and Guatemala have been running as expected and are invaluable in demonstrating our large program experience and capabilities to customers as we bid on major projects worldwide. Most of these programs also have already integrated CertScan into their software. The aviation passenger traffic domestically is returning closer to pre-COVID levels, while international traffic is returning at a slower pace. Since we have exposure to both US and international airports, we expect our aviation business worldwide to grow as these customers will require the latest technology, inspection systems, service, and support to handle the growth in an efficient manner. During March, we hosted the Rapiscan Systems Golf Classic FPGA Tour event that was held in Biloxi, Mississippi. We want to congratulate the winner, Steve Elker, and thank all others that helped make it a successful event. Many of our employees, industry partners, and customers, both domestic and international, had the opportunity to attend and interact at the Classic. The event also raised $1.6 million to support local charities in coastal Mississippi. Over the last couple of years, the Security Division has successfully managed to work through the COVID-related challenges in the marketplace and meet customer demand. Going forward, we anticipate higher demand at ports borders and airports, and a greater willingness from these customers to initiate major projects that were delayed during the pandemic. We have a strong backlog and a pipeline of significant global opportunities across our product portfolio. The recent acquisitions during the quarter also bring new customer relationships that we can leverage to provide other products and services from our existing offerings. With a strong backlog, We are poised for a significant sequential increase in sales and profits in this division. We believe that our ability to offer leading technology and innovative solutions positions us well into fiscal 23 and beyond. Moving to our optoelectronics and manufacturing division. In Q3, revenues were solid while bookings were exceptional, leading to a record backlog for the division. The opto division continues to work through global supply chain and logistics challenges to successfully serve its large OEM base that also includes our other divisions, security and healthcare. Opto saw growth across certain product groups, especially optical components and assemblies for healthcare and technology OEMs. We announced a couple of notable wins, a multi-year order for approximately $35 million to provide electronic assemblies for use in patient care applications, and an order for approximately 5 million to provide electronic components to a leading x-ray imaging OEM manufacturer. During the quarter, APTO division also continues its efforts to make its new Indian facility fully operational, which expands our footprint in the region to handle the anticipated future growth, especially for healthcare products. Moving to the healthcare division, Space Labs, where we had a strong core. Although revenues were down about 3% than the prior year's Q3, which was expected as last year's Q3 contained patient monitoring revenues from COVID-related tailwinds, the division achieved nice operating margin expansion driven by higher gross margins from a favorable product mix. During the quarter, we saw strength in the U.S. channels. Our cardiology products continued to do well in the quarter with double-digit revenue growth. During the quarter, we also continued to make significant investments in research and development for new products. As we did with the safe and sound technology acquisition, we will continue to explore opportunities to add technology to enhance our core product portfolio of patient monitoring and cardiology. Overall, the healthcare division has performed well as the market activity has shifted from COVID-centric demand to more normal historical demand patterns. Throughout this year, I've been impressed with the commitment of our employees to manage the unique challenges in the marketplace and relentlessly serve our customer base. We look forward to finishing the year strong and further enhancing our value to our customers that are critical in promoting health and safety worldwide. As always, I would like to thank our employees, customers, and stockholders for their continued support. With that, I'm going to turn the call over back to Alan to talk more in detail about our financial results and guidance before we open the call for questions. Thank you.