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spk04: Good day, and thank you for standing by. Welcome to OSI Systems, Inc., first quarter 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Alan Edrick, Chief Finance Officer. Please go ahead.
spk01: Well, thank you. Hello, 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 23 First Quarter Conference Call. We are pleased that you can join us as we review our financial and our operational results. Earlier today, we issued a press release announcing our first quarter Fiscal 23 financial results. Before we discuss these results, however, I would like to remind everyone that today's discussion will include forward-looking statements and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 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 the discussion of our Q1 financial performance and then turn the call over to Deepak for an overview of our business performance. We will then finish with more detail regarding our financial results and a discussion of our outlook for the year. Our first quarter revenues and earnings were generally consistent with our expectations. We anticipated a softer start to the fiscal year with momentum building beginning in Q2 as supported by the timing of planned deliveries from our significant backlog. As we navigate the current economic environment, including supply chain delays and increased cost, disruptive geopolitical events, inflation and rising interest rates, along with the ongoing effects of COVID-19, we continue to prioritize delivering on commitments to our customers and business partners and positioning the company for long-term success. Now we will go through a high-level summary of our financial results. First, we reported Q1 revenues of $268 million. a 4% year-over-year decrease. These results included an approximately $4 million adverse FX impact. Second, we reported adjusted earnings per share of 87 cents, down from $1.16 in Q1 of the prior year, as a result of the reduced revenues just noted, a less favorable mix of sales, and additional interest expense under the credit facility, which was increased in December 21, with a primary objective of retiring the convertible notes. Third, Q1 bookings were solid, with a book-to-bill ratio of approximately 1.2, leading to a record quarter-end backlog of nearly $1.3 billion. And finally, operating cash flow for the first quarter was $17 million, representing a $28 million improvement over Q1 of the prior year. Capital expenditures of approximately $3 million were consistent with the same prior year quarter. We were again active in our stock repurchase program spending approximately $17 million in the quarter. And then further, last month, our board increased to 2 million shares, the number of shares authorized in our stock buyback program. Before diving more deeply into our financial results and discussing the fiscal 23 outlook, I will turn the call over to Divak.
spk00: Thank you, Alan, and good morning to all of you. Our fiscal 2023 first quarter's performance was generally to our expectations. As Alan mentioned, we expected the revenue growth in fiscal 2023 to be more skewed towards the second, third and fourth quarter. We had very good bookings quarter, achieving a book-to-bill ratio of 1.2. Despite our start to the fiscal year, With a significant backlog and near-term visibility on certain attractive opportunities, we expect the 2023 fiscal year to be in line with our initial revenue and adjusted earnings guidance, implying strong growth for the next nine months. Our operating cash flow in Q1 exceeded operating cash flow in the same quarter last year, and we anticipate even greater operating cash flow over the balance of the year. I will not talk about each division's performance in the quarter, starting with the security division, where Q1 revenues were 3% lower year over year, and bookings were approximately $204 million for a book-to-bill ratio of 1.4 for the quarter. The lower operating margin in the security division for the quarter was mainly due to the product mix and lower revenue of the division. We expect security division operating margins to improve significantly as we progress through the rest of the year. The overall demand for Check Point security products and related services continue to improve as airport and related activities has ramped up. We saw higher demand for our supplies and accessories also, which include consumable items that are a recurring revenue source. RaptorScan's inspection systems will be used, we are very proud of it, at the FIFA World Cup 2022 to be held in Qatar. We are finalizing our preparation for the event, which starts in late November. Our Orion 920CX baggage and parcel inspection systems, larger Tunnel 922CX models, and METR 6X walk-through metal detectors will be among the equipment utilized to screen thousands of people and bags daily during this prestigious soccer event. We continue during the quarter to stay active in pursuing and securing port and border security customer opportunities, both in US and international. We had multiple wins and announced a couple of them. We received an order for $22 million to provide comprehensive service, maintenance and spare parts support for various rapid scan cargo and vehicle inspection CBI systems deployed internationally. The most significant activity at the border for us relates to the large orders we received from the U.S. Customs and Border Protection that are expected to be delivered primarily over the next two to three years. Our cargo and vehicle inspection products are used extensively at borders to prevent contraband and illicit materials and drugs such as phenethyl and methamphetamine. from crossing into the US. We continued to deliver of the inspection products to CBP in Q1 with modest amount of revenue, significant revenues from this CBP program over the balance of the fiscal year and in fiscal 2024. However, the timing can shift a bit due to customer needs and assessments. We also continue to invest in technology and solutions that enhance our security offering and can drive recurring revenues. During the quarter, we completed the acquisition of a small strategic acquisition called Quadrita, a UK-based provider of training core software for checkpoint security operators. We expect to further develop this technology and integrate it with our existing CertScan software platform and training modules to broaden our standalone subscription offering for security customers. CertScan is a common integration platform designed specifically to work in multi-system, multi-site security inspection programs and help customs and security operators perform at their highest levels. CertScan is deployed at major ports and checkpoints worldwide and is getting lot more publicity and acceptance. Our turnkey service operations in Puerto Rico, Albania, and Guatemala continue to do well as our customers rely on these programs for security and to enforce regulatory trade and tariff requirements. The revenues from these services vary from quarter to quarter, in relation to the specific volume of port activity. During the quarter, we added a new multi-year turnkey services customer during the first fiscal quarter. Although small in size, this is very significant as it's the first in the airport aviation sector. The services are expected to include daily screening of the airport staff and crew and screening vehicles and occupants at the airport's perimeter access control points. Securities backlog is strong and increasing activity across many of our end markets provides a lot of confidence for the remainder of 2023. Moving to the optoelectronic and manufacturing division, Apto delivered strong results in the first fiscal quarter with $94 million in revenue, including intercompany revenue, which is an all-time quarterly record with strong growth in the division's operating profit. Apto's momentum is expected to continue as a backlog at the end of Q1 23 was 22% higher than the backlog at the end of Q1 2022. Opto has been gaining new customers and becoming a preferred supplier for many OEM customers. As an example of high customer satisfaction during the quarter, our Flex operation was awarded Zoho's Heart Safe Hero Award for being a valued critical supplier to Zoho's heart defibrillation product line. which is a great honor. In addition to the healthcare, Opto's OEM customer base is diversified in multiple markets, including defense, space, consumer high-tech, industrial, and automotive. Given the anticipated high demand in Opto, we have expanded our operations for manufacturing in Canada, India, and in Batam, Indonesia. Turning now to the healthcare division where Q1 was challenging quarter with sales down 14% year over year. Q1 was a tough comp as last year's quarter still had heightened sales given the spike in cases with the COVID Delta variant around that time. During the quarter, we have several orders from various US hospitals and we announced one of the larger ones, a $4 million order to provide patient monitoring solutions and related accessories to a US-based hospital in which we expect to provide exhibit, central stations, area telemetry, expression, patient monitors, cube patient monitors, and safe and sound patient management software. We have been increasingly successful in adding software modules, such as safe and sound, to the bundled patient monitoring products, which lifts the recurring revenue portion of our overall sales and differentiates our products from our competitors. We continue to invest in R&D and healthcare to bolster our core offerings. Our customers are increasingly looking for solutions with enhanced connectivity and remote monitoring capabilities, which are the focus of our R&D efforts. With significant backlog in security and opto, we feel good about our prospects in these divisions for the balance of 2023, and we also expect stronger performance from healthcare as we look forward to the rest of the fiscal 2023. With that, I will turn the call back over to Alan Edrick to talk in more detail about our financial performance before opening the call for questions. Thank you.
spk01: Thank you, Deepak. Now let's review the financial results for our first quarter in greater detail. Our first quarter revenues were down 4% compared with that of the prior year Q1, or approximately 2% on a constant currency basis given the strength of the dollar. Fiscal first quarter security division revenues were down 3%, largely due to the unfavorable FX impact. The security division book to bill, as Deepak mentioned, was approximately 1.4, positioning the division well going forward, and we anticipate significant sales growth commencing this quarter. Opto sales increased 2% year-over-year on the growth of intercompany sales to support anticipated upcoming security sales, while opto third-party sales were consistent with third-party sales in the prior year quarter. Opto bookings were again solid, leading to a record opto backlog, but supply chain constraints have led to delays in production and shipments of certain orders. The healthcare division reported a 14% reduction in year-over-year revenues, in part due to a tougher year-over-year comp given the prior year demand during the COVID Delta variant surge. The Q1 gross margin was 32.6%, about 2.9% below that of the prior year. This change was primarily driven by the lower sales in the healthcare division, which carries the highest gross margin of our three divisions, higher opto sales as a percentage of total sales, as this division tends to carry the lowest gross margin of the three divisions, and a less favorable mix in the security division sales, with increases in certain component and freight cost adversely impacting each division's gross margin. Our gross margin in general will fluctuate from period to period based on revenue mix and volume, inflation, impacts of supply chain, among other factors. Moving to operating expenses. We continue to work diligently across each of our divisions to improve efficiencies and prudently manage our SG&A cost structure. Our Q1 results again demonstrated the success of these efforts. Q1 SG&A expenses were $53.4 million or 19.9% of sales compared to $57.3 million or 20.5% of sales in the prior year Q1. While foreign exchange was a headwind to the top line revenues, it did have a beneficial impact in our operating expenses. Research and development expenses in Q1 of fiscal 23 were $14.5 million, relatively consistent with that of the prior year. We continue to dedicate considerable resources to R&D, particularly in security and healthcare, as we remain focused on innovative product development, which we view as vital to the long-term success of our businesses. In Q1 of fiscal 23, we recorded $1.2 million of restructuring and other charges compared to $2.5 million of such charges in Q1 of the prior fiscal year. Moving to interest and taxes. Net interest and other expense in Q1 of 23 increased to $3.4 million from $2 million in the same prior year period, primarily due to rising interest rates and the maturity of our 1.25% convertible notes on September 1st which were at a lower rate than our current borrowings. We executed an interest rate swap during Q1 to fix a portion of our floating rate debt. On the tax side, our reported effective tax rate under GAAP was 24.4% in Q1 of fiscal 23, compared to 15.9% in Q1 of fiscal 22. In Q1 of fiscal 23, we recognized a discrete tax benefit of 0.1 million as compared to a discrete tax benefit of $2.1 million in Q1 last year. Excluding the impact of discrete tax items, our normalized effective tax rate in Q1 of 23 was 25.1% compared to an effective normalized rate of 25.4% in Q1 of fiscal 22. I will now turn to a discussion of our non-GAAP adjusted operating margin. Our adjusted operating margin in Q1 of fiscal 23 decreased to 8.7% from 10.9% in the same prior year period. This was primarily driven by the reduction in revenues and gross margin previously described. We were pleased with the increase in the adjusted operating margin in our Opto division, which expanded 12.7% in the first quarter of fiscal 23 from 11.4% in the prior fiscal year first quarter due to a more favorable product mix and implementation of certain efficiency improvement initiatives. The adjusted operating margin in the security division decreased to 12.8% in Q1 from 16.2% in the prior year first quarter on lower revenue with reduced gross margin on a less favorable product mix. We expect nice sequential improvement in this division in Q2 on stronger revenues and a more favorable revenue mix. With lower revenues and a less favorable revenue mix, the adjusted operating margin of our healthcare division decreased to 4.9% from 12.1% in the prior year quarter. We are forecasting this division to show significant improvement over Q1 as early as this quarter. Moving to cash flow. Cash flow provided by operations was 17 million in Q1 of fiscal 23. compared to cash used in operations of $11 million in the same prior year quarter. The increase was driven by working capital improvements. CapEx in the fiscal first quarter was $3.2 million, while depreciation and amortization in Q1 was $9.5 million. We continued to be active in our stock buyback program in Q1 of fiscal 23, during which we spent $17.3 million to repurchase about 208,000 shares. Our board increased the buyback authorization in September, and as of quarter end, approximately 1.9 million shares were available to repurchase under the program. Our balance sheet is solid, with net leverage of 1.6 and significant capacity for acquisitions and additional stock buybacks. We retired the convertible notes in September, utilizing a combination of our revolver and term loan, which we had put in place in December 2021, primarily for this purpose, leaving plenty of liquidity. Aside from about $7 million of annual required principal payments under the term loan, the bulk of our debt matures in fiscal 27. And finally, turning to guidance. We are reiterating our previous revenues and non-GAAP adjusted earnings per share guidance. This implies revenue growth in the range of 7% to 11% and adjusted EPS growth of 17% to 22% over the remaining nine months of fiscal 23. The non-GAAP diluted EPS range 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. We currently believe this revenue and non-GAAP earnings guidance reflect reasonable estimates. The actual impact on the company's financial results of the COVID pandemic Disruptions and increased costs in the supply chain and rising inflation and interest rates is difficult to predict and could vary significantly from the anticipated impact currently reflected in our estimates and guidance. Actual revenues and non-GAAP earnings per diluted share could also vary from the anticipated ranges due to other risks and uncertainties discussed in our SEC filings. We continue to remain focused on the growth of our businesses and continued proactive management of our cost structure. We believe our efforts in these areas will enable OSI to continue providing innovative products and solutions. We look forward to continuing to navigate through the current dynamic and challenging environment while gaining traction in key strategic growth areas and positioning the company to capitalize on improving end markets such as aviation. We would like to take this opportunity to thank the global OSI Systems team for its continued dedication in supporting our customers and our partners. And at this time, we would like to open the call to questions.
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question comes from Ryan Rutenberg from Imperial Capital. Your line is now open.
spk07: Great. Thank you very much. Great quarter. And let me just jump right into questions. Thanks, Brian. So can you give us an update on the status of the TSA certification where you are on the CT-based inspection equipment?
spk00: Yes, Brian. Hi, this is Deepak here. As we have mentioned before, on the checked baggage side, the present certification that we have is 5.8. which applies to cargo, and we've been very successful in that side. There is no specific qualification for the ongoing, the replacement cycle, which according to TSA is still a couple of years away, and they're still finalizing with the European Union what the final procedure is going to be. So at this stage, we have 5.8, same as other people, and we are quite successful in whatever is happening, especially in the cargo space.
spk07: Okay. Is there any update on the upgrade cycle that's supposed to be happening, I guess, for the last five years we've been talking about this, but in terms of the U.S. TSA with checked baggage?
spk00: Well, the only thing we know is that it's pushed out. It's 24-25. But we hear it. It's not in our hands. It's in TSA's hands. And they basically have to make their decision. And COVID has pushed everything to the right. But in the European side, there's much more activity. And we are very well qualified to win those orders.
spk07: Great. Moving on to the opto side real quick, it continues to perform extremely well. What is driving this? Is there anything specific, a specific sector, a specific product that is driving all this growth?
spk00: Well, maybe Alan can add on to it. But in my view, looking at it, all the sectors have done very well. Automotive sector has been very, very successful. Medical has been very good. And it continues to show very strong growth. That's one of the things that Alan mentioned also. The FlexCircuit, which is a division in the OSI Electronics, has done very well, and we want some great kudos from our customers. But in aerospace, in defense, in high-tech consumer electronics, industrial, name the sector. Good news is that's one of the things we are very proud about it. It's a very diversified product portfolio. And we personally think one of the things that I've said in the before, one of the things that has also helped us very much There's a lot of desire by the OEM customers to move away from China. And with our presence in Indonesia, our presence in Malaysia, our presence in India, it's been a good blessing for us. And that's one of the reasons I said in my speech that we have expanded our facilities there. That has been a big positive. Alan?
spk01: Yeah, I think what Deepak was describing is exactly right. You know, our diversified model, our diversified customer base, in medical defense, aerospace, technology, industrial, automotive, amongst others, has really played us well. And I would really say hats off to a lot of our sales and business development teams for going out there and getting new business from existing customers as well as bringing in brand-new customers. So we've really seen tremendous strength in the division, and we're certainly hopeful we're going to see that continue for the foreseeable future.
spk07: Great. And then just my final question is on the health care division. It was weak kind of year over year from first quarter last year. When do you expect to see that recovery? And was there a specific reason it was weak year over year in this first quarter? Was there a specific shipment or a product line that that didn't go out?
spk00: Well, again, Brian, one thing is that first quarter is relatively weak to begin with, historically. And secondly, that we expected that. Last year, COVID was still there. A lot of demand of a patient monitoring at quick turnaround. That demand has slowed down. So that it's down. Obviously, we are not that happy. But we look at the second, third, and fourth quarter will be stronger. And there is a lot more activity. And one of the things is we are investing quite heavily in safe and sound, our software platform, which has been very well received and basically makes us a little bit different than our competitors. And we continue to look at that as a growth opportunity. And it also has higher margin. Alan, you want to add on?
spk01: Yeah, I think that Deepak summarized it well. But Brian, we do expect to bounce back with a stronger sequential quarter for sure here in Q2. and pick up some further strength in the second half of the year. So we do believe the performance in the healthcare division will look much better the rest of the year compared to Q1.
spk07: Great. Thank you very much.
spk04: And thank you. And one moment for our next question.
spk05: And our next question comes from Larry Solo from CJS Securities.
spk04: Your line is now open.
spk02: Great. Good morning, guys. Just a couple of thoughts. Deepak, you mentioned, I know you've been talking about this for a couple of years, just the large couple orders, I think it's $200 million with customs and border protection. Has that actually, have you started to deliver on that at all? And then I guess part two, I know I think last quarter you talked about a little bit of a, We'll have a stretch out in terms of deliveries. Is there any update on that? And it's been about a year since you, I guess, I think there's still a pretty large piece of the IDIQ remaining. What's your visibility on additional orders?
spk01: Larry, this is Alan. I'll take the first part of the question and Deepak can follow on. So, yeah, we began delivering some of that CBP orders from the IDIQ in Q4 of last year, which continued into Q1 of this year. Pretty modest revenues, I think, as Deepak mentioned in opening remarks this quarter. That being said, we expect to see a significant acceleration of the revenues beginning now. So we'll see much bigger revenues in Q2 and Q3 and Q4, continuing on into 24 and maybe part of 25. So that's kind of what our current outlook is. And then we would anticipate there could be follow-on orders, Deepak, if you want to add.
spk00: Yeah. Larry, this is Deepak here. Alan put it well. The ramp up will start faster now in Q2, Q3, Q4 of this year compared to what was in this month. And most of that has nothing to do with us. It's the delay. It's the civil works not ready in some other places. It's the delay from that side so that it will continue. And like Al mentioned, it will continue into 2024. and beyond, and we still are very confident that with that, we are very well positioned that from the IDIQ, there could be some additional bookings also as more products are delivered, so that we look at this as a long-term play. We've always said that, and yes, some of the things are not in our hands, but CBP is a very focused customer, and they need certain things to be done at the border, and we are very well placed with it, including our search scan software, which is very important.
spk02: And is the CBP, I guess, would that be the only agency involved, I guess, for the U.S. border, southern and northern border? Are there other agencies and then other, I assume there are significant international opportunities, right? Because in terms of vehicle inspection across the globe, I think is minimal today, right? And there are I don't know if it's aggressive estimates, but people want to eventually target searching a large majority, at least the commercial vehicles, if I'm not mistaken.
spk00: Well, you put it very well. CBP is the main customer in that. Yes, there's international traction, and that's why we're very excited about the CertScan software implementation also. But in addition, one of the other comments we want to make is there are other agencies, which is not to do with border security. There are other agencies like State Department, the Department of Defense and stuff, also are very big customers for us, and we continue to get a lot of success with the other divisions of the U.S. government and international governments.
spk02: Got it. Okay, great. Just I want a quick follow-up just on Brian's question on the opto segment, and you said Backlog was up 22% year over year. It's a pretty significant number. Is that, I assume, some prices in there, or is that mostly volume? And was there any talk in acquisitions in that, or what kind of drove that? It is a large number. Are there some larger, longer lead time orders in there that's scaling that, or is it just pretty much pure growth?
spk01: Larry, this is Alan. Good question. And it is all organic, as we haven't done any acquisitions during that period of time in the Opta division. what we're seeing from some of the customers with some of the challenges and supply chain and longer lead times is at times they're giving us a longer order. If somebody used to give us a three-month order, they might give us a six-month order. If somebody gave us a six-month order in the past, perhaps they might give us a nine or a 12-month order. So we're getting some larger orders as a result of that to give greater visibility going forward. A little bit of price with passing on certain purchase price variances and stuff with inflation, and certainly growth in unit volume as well. So really a combination of all of those factors.
spk00: Larry, just to add on to Deepak here, the other thing I want to emphasize, there's a lot of focus on it to move away from China. And if you have done well with your customer and you have the ability to support it and you have the supply chain under control and facilities like we have, and we have said that we have expanded them in Batam, Indonesia, Malaysia, India, that has played a big part of capturing more business from our regular customers who basically are more focused on seeing growth and working with a smaller bunch of vendors And we are well-positioned in various places and have been a very, very good supplier to our customers.
spk02: Got it. Great. I appreciate that, Collar. Awesome. Just this last question, just on the cash flow, Alan. I know Q1 obviously was a little bit certainly into the back-end load a year, but the operating cash flow did exceed net income in the quarter on even an adjusted basis. Do you expect that to continue on a full-year basis? I don't think you guys specifically... to free cash flow, but do you expect operating cash flow and free cash flow to obviously improve over the last year, but do you expect it to sort of come close to net income as it has in the past?
spk01: Yeah, Larry, while we do not provide cash flow guidance per se, we really believe there is opportunity for strong free cash flow in fiscal 23. And we do expect inventory to remain at an elevated level this year. But in terms of the conversion, I do think we can have very strong conversion certainly north of where we were last year and approaching where we used to be in the past. And all three of our businesses are finely tuned to the key levers that drive the strong operating cash flow and free cash flow. So, yeah, some great opportunity there.
spk02: Got it. Great.
spk01: Thanks again.
spk04: And thank you. And one moment for our next question. And our next question comes from Christopher Glenn from Oppenheimer. Your line is now open.
spk06: Thanks. Good morning and good afternoon, depending on where you are, I guess. So question on optoelectronics, you know, curious if you could size the past due backlog and also related to that, you know, if and as you're able to unlock it, is there a real run rate step up related to that in and around what you mentioned about migration from China? It just seems like this business is kind of restrained and as good as the numbers have been, the backdrop that you describe almost sounds like it's in another realm still.
spk01: Yeah, Chris, really good question. This is Alan. I wouldn't necessarily categorize it as past due backlog because we're working quite well with all the customers there. But that being said, there would probably be some opportunity, probably something less than $10 million of extra revenues we could have had had there not been certain component shortages. You might have 98% of the parts, but if you're missing those final 2%, you can't ship a complete part So it's not a big backup there that will then unleash significantly higher revenues. But we just expect continued strength in the business each quarter over the balance of the fiscal year.
spk00: Well, this is Deepak. I mean, I think Alan has put it well. I'll also emphasize to it that we are very much focused on what we call it value-added. So if you're working with a customer to supply products, five dollars a parts the focus now with a broad technology and our our global presence we're trying to work out can we add more value to that which is a very very good strategy for the after group because that gets us higher on the food chain on the customer's list and as the customer looks at it we basically continue to work with them to get more value added that we can supply which we think long term will continue to grow great and um
spk06: One on security, you know, you've had backlog there, the big chunk from the CBP. And, you know, in some cases, backlog businesses have a little bit more challenge with price cost. It certainly sounds like you flushed out the worst of price cost mismatch and backlog in the current quarter. But I just want to revisit, you know, first affirm that point or clarify. And then with the big IDIQ, how do you preserve the economics of those wins from when you bid them? And is that even possible?
spk00: Good question. You're absolutely right. On longer-term contracts, price is fixed. So you can't change it. But we haven't seen though there's been some push-outs and stuff because of component shortages and site not ready, but I would say on a bigger scale, up to now we've not seen too much erosion of our margin on what I call on paper looking at the products. And the same way, think about it, that all indications are that there is some easing in the supply chain, both in freight and in component cost and stuff. So as we push that product out with a longer timeframe we have, we expect that things will stabilize.
spk06: Great. Thank you.
spk04: And thank you. And one moment for our next question. And our next question comes from Jeff Martin from Roth Capital. Your line is now open.
spk08: Thanks. Good morning, Ellen and Deepak. Hope you're doing well. Deepak, I wanted to see if you could give us a little more detail around the traction that CertScan may be getting. Is it still too early to be talking too much about that? Also curious about how long the sales cycle is there and when we might expect to see a little more accelerated ramp for it. Sorry, secondarily, how that ties into the the Quadrata acquisition that you mentioned this morning?
spk00: Thank you. Good question, Jeff. You know, with the way it's been slow progress with CVP in this quarter, we expect the second, third, fourth quarter to be stronger. Same thing as it goes in 2024. As more and more install base happens, it also brings with it the cert scan software. And the other good news for us is that we have got the certification of what is called ATO, which is a big plus for the software to be installed at various locations that the customer wants. So we continue to see progress, though it's a slow progress. At the same time, Quadrata brings to us a combination of training and search scan so we can mix the things together and give more applications and more capability of supporting additional functions that the customer wants us to do. So all that stuff continues to our focus that ultimately this software, not only just in U.S., but in other parts of the world, will continue to become like a licensing software with a recurring revenue, which is happening. It's not like it's tomorrow. It's education purposes that we have to work with the customer and their needs. But all indications are that in many places, especially with CBP, we're getting a lot of traction.
spk08: Okay, great. And then you'd mentioned the first new multi-year turnkey customer in airport aviation. I'm curious to know a little bit of background how that opportunity
spk00: evolved and eventually came to light and then what what you are thinking in terms of is that a major strategic initiative for rapid scan going forward well i'll answer it backwards one we think just look at our history from where we were five years ten years ago uh we basically have taken on a new line uh ports and borders have been very well received with our with our turnkey solution. I've been very successful. So we've been working very diligently to see what other places we can look at it. Aviation happens to be another area, which as you have read, I'm sure everybody's talking about it. You can't do inspections fast enough if you have to keep increasing the people labor. Labor is not there. So this kind of automation is a natural play. We have demonstrated to the customers, have been working with them, what can be done in the ports and border security and other areas. So we found a successful win in a new area internationally, though very small right now. It's what I would call is a beginning of a new marketplace opening up for the aviation side. And we are working diligently. It's not a needle changer right now, but it's strategically very well. And as that expands and gets more successful and we can take more show and tell to other customers, we think it's a new market.
spk08: Great. Then last question with the hurricane going through Puerto Rico and causing significant disruption. I was just curious if you saw any disruption with your turnkey operations there.
spk01: Jeff, this is Alan. No significant disruption, obviously, for a few days while it was occurring. But our general volumes in Puerto Rico tend to be about the same. Some delays and some paperwork and the like down there. But overall, no significant change in Puerto Rico.
spk00: And just to add on to it, fortunately, no damage to our equipment and our employees are all safe. And during all this time, we worked diligently and we continued, as Alan mentioned, we are continuing to work.
spk08: Excellent. Thanks for your time, guys.
spk04: Thank you. And thank you. And again, if you would like to ask a question, that is star 11. Again, if you would like to ask a question, that is star 11.
spk05: One moment for our next question. And our next question comes from Josh Nichols from B. Riley.
spk04: Your line is now open.
spk03: Yeah, thanks for taking my question. One, I just want to ask a little bit about the small acquisition that you did. I know that that's going to be integrated with CertScan. Could you elaborate a little bit on that and progress that the company has made growing its more SaaS revenue base and the opportunity on that front as we look out a little bit further forward?
spk00: Well, good question. It's a very small acquisition. They do training. They are based in the UK. They do training for people in the inspection space at checkpoints. We have been using them as a vendor for some time and thought it was strategically good that now we know about it to combine it so that we can broaden our search scan platform for opening more applications to our broader customer base. And yes, it's all heading towards a SaaS model between SearchScan and Quadrica, and we feel that it will continue. But again, I want to emphasize, and again, before the other person asked the question, we definitely believe long-term this will continue to grow. It's a slow path. It's a new area we are entering into. We're working with our customers. And according to the SAS model, we look at it as a licensing plus good margin. And we're also very much focused onto it, that it's agnostic to which equipment it's hooked onto, whether it's rapid scan equipment or our competitor equipment, whether it's x-ray machines, whether it's television cameras or whatever. So we continue to broaden our application need for this software model.
spk03: Thanks. And then just curious, so the new turnkey that you announced, you know, small in size, but the first in the airport aviation sector, is this like a land and expand opportunity? Could this become more meaningful? I'm just curious about the growth opportunities here or if there's more opportunities in the aviation sector where previously you haven't really done so much on the turnkey side.
spk00: Yes, yes and yes. We basically have a multi-year contract It's starting very small to see whether the viability of it, as it expands even at the present customer, it can significantly expand as more and more applications are into it. And then as this becomes a model, same model that we have said before from Puerto Rico to Mexico to Albania to that in the borders and ports, we feel that it's a good model to expand into the aviation sector. And we'll continue to see some success as we demonstrate the efficiency of this turnkey model.
spk03: Thanks. And then last question for me, just with shares kind of trading pretty depressed level seven to eight times EBITDA, despite you have a record backlog. And I think the outlook for this year is that growth is going to accelerate materially relative to last year. What's your thoughts on the buyback? You've obviously been buying back pretty aggressively with the cash over $50 million. Are you comfortable allocating a very large percentage of your free cash flow to share buybacks if the stock does remain at these levels? Or what's your thoughts on the capital allocation strategy there?
spk00: Well, you know, we don't talk about what these things are specifically in the future, but you've said it very well. We are very much aggressive in it. We feel we are undervalued and we continue to look at when we are able to buy. And the board has been very, very supportive of it with the increasing of the stock purchase plan. And we've been very active into it and we will continue to be active.
spk03: Great, thank you.
spk05: And thank you.
spk04: And I am showing no further questions at this time.
spk00: Well, I want to thank everybody. I know it's in the morning time and the market is still open. Thank you very much for taking the time to attend it. I want to thank all of those in attendance to it. And I again want to emphasize and thank our employees and their families and our customers to be full support in working together. And we thank you and look forward to our next conference call. Thank you very much.
spk04: This concludes today's conference call. Thank you for participating.
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