OSI Systems, Inc.

Good day, and thank you for standing by. Welcome to OSI Systems, Inc. Second 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 will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 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, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you. 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 23 Second 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 second quarter fiscal 23 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. 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 Q2 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 overall fiscal year. Our second quarter financial results were solid as we navigated the current economic environment, which continues to be impacted by supply chain delays and increased costs, disruptive geopolitical events, inflation, and rising interest rates. Our bookings and book-to-bill ratio were very strong last quarter, and we were awarded some significant contracts, which we will discuss during this call. But let's start with a high-level summary of our Q2 results. First, we reported Q2 revenues of $296 million, representing a year-over-year increase of 7%, driven by solid revenue growth in our security and opt-out divisions, which were in part offset by soft healthcare division sales and an approximate $4 million unfavorable FX impact. Second, we reported Q2 adjusted earnings per share of $1.19, down from $1.28 in Q2 of the prior year as a result of a less favorable mix of sales, which was anticipated, and additional interest expense. And third, Our Q2 bookings were over 500 million, representing a book-to-bill ratio of approximately 1.7, leading to a record quarter and backlog of nearly 1.5 billion. Before diving more deeply into our financial results and discussing the fiscal 23 outlook, I will turn the call over to Dibak.

Thank you, Alan, and thanks to everyone joining us on today's call. Our performance in Q2 of fiscal 23 was solid as we grew the top line while continuing to successfully operate in a macro environment challenged by the multiple factors that Alan mentioned. Our Q2 bookings were very strong, resulting in a record quarter end backlog. We believe we are well positioned for the second half of fiscal 23 And this also positions the security division especially really well entering for fiscal 24. Let's discuss each division's performance starting with security. The security division delivered Q2 revenues of $167 million, about 15% higher than Q2 in the prior year. We were pleased with the division's profitability, expanding our operating margin to 12.9%. Our security bookings were very strong and resulted in a book-to-bill ratio of 2.3 for Q2 and 1.9 times for the first half of fiscal 23 for this division. We continue to deliver on the large existing U.S. Customs and Border Protection CBP programs we announced in fiscal 22. These CBP programs focus on improving security at the U.S. borders by utilizing our cargo and vehicle inspection platforms, SurgeScan integration software, and Gatekeeper vehicle checkpoint lane control solutions. SurgeScan is our proprietary software solution that helps manage inspection image data, traffic, vehicle identification, and integrates with other systems at checkpoints to streamline and facilitate the inspection process. Search scan is also compatible with third-party inspection systems, making it a versatile option in the marketplace. Based upon CBP's current timing, some push out from Q3 to Q4 has happened from what was previously anticipated. While Q2 year-over-year security division revenues were up double digits and operating margin expanded, We believe the most notable item of the quarter was our exceptional bookings highlighted by a $200-plus million international order that we received in December and announced shortly afterward quarter end in January. Our deliverables are expected to include a number of our cargo and vehicle inspection products and radiation portal monitors along with the managing the civil works and providing operator training and ongoing maintenance in the coming years. We are not forecasting any significant revenues related to this award in fiscal 23, but this contract provides strong visibility into fiscal 2020 in the 24 security revenues. We are currently working on the schedule with this customer and expect to have more to share on future calls, though we will start some of the manufacturing production in fiscal 23. During November and December, we were proud to support the security efforts at the FIFA World Cup in Qatar as the primary provider of security detection products. This event was held at multiple stadiums around Doha and our Orion 920CX baggage and parcel inspection systems and Metro 6X walk-through metal detectors were successfully utilized to provide screening for over 2.5 million ticket holders and their belongings. In addition, these products were also used at the primary airport, hotels, and other venues throughout the city. This order was and will be a great showcase for rapid scan products in Middle East for time to come. In turnkey services, our projects in Albania, Puerto Rico, and Guatemala continue to perform well. The initial planning phase is underway for the new turnkey airport services multiyear contract, which we received earlier in fiscal 2023. As part of this contract, we expect to manage screening services at a European airport for the staff, airline crews, and vehicles at perimeter entry points. Initially, though, as we have said before, this is a small contract, but it's a first in the aviation space. Looking ahead, we believe that security with a strong backlog and visibility into other key opportunities in the pipeline is well positioned for the second half of fiscal 2023 and beyond. Shifting to optoelectronics division, that had another great quarter as third party Q2 revenues were 80 million, which represented a new quarterly record for the division. This division achieved a solid operating margin in spite of continued supply chain cost pressures extra. Apto serves a diversified OEM customer base in aerospace, defense, healthcare, and consumer technology, among others. In these markets, certain OEMs are seeking to reduce their exposure to China sourcing and further de-risk their supply chains by transitioning to other viable manufacturing regions in the east. We believe we could benefit significantly from this given our global manufacturing footprint covering Malaysia, Indonesia, India, United Kingdom, and the U.S. Looking ahead, With a strong Q2 ending backlog that is almost 20% higher than this time last year, Opto is well positioned. Moving to the healthcare division, this was a disappointing quarter. But we believe and expect stronger second half of the fiscal year in this division. We continue to significantly invest in developing new products to further strengthen our patient monitoring and cardiology portfolio. Subsequent to the quarter end, we bolstered the sales leadership in US with talent that we believe will help drive stronger results and position the business to thrive. Going forward, we plan to maintain our focus on innovation and operational execution while staying flexible to handle the opportunities as markets can change quickly. Overall, We are pleased with the company's fiscal 2023 second quarter performance as we grew our top line, achieved significant bookings that have resulted in a record backlog. In addition, with the record backlog and a strong pipeline of opportunities, we believe we are well positioned for the second half of fiscal 2023 and 24. I would like to thank our employees, customers, and shareholders and look forward to the second half. I will now turn the call back over to Alan Edrick to further discuss our financial performance before we open the call for questions. Thank you.