OSI Systems, Inc.

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.

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.

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.