OSI Systems, Inc.

Thank you for standing by, and welcome to the OSI Systems Inc. Third Quarter 2023 Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Alan Edrick, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Oh, 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 Third 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 third 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 comparable 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 Q3 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 remainder of the fiscal year. Our third 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. We are excited about finishing the fiscal year strong and entering fiscal 24 with solid visibility given excellent backlog. I will start with a high-level summary of our Q3 results. First, we reported Q3 revenues of $303 million, representing a year-over-year increase of 4%, driven by solid revenue growth in our security, and opto divisions, which was in part offset by soft healthcare division sales and an approximate $4 million unfavorable FX impact compared to prior year rates. Second, we reported Q3 adjusted earnings per share of $1.49, up from $1.43 in Q3 of the prior fiscal year, despite the negative impact of approximately $0.16 per share of additional interest expense due to higher interest rates this year versus last year. Third, we generated strong third quarter operating cash flow of $65 million. And fourth, while our Q3 bookings were sound, perhaps the most notable item is that just after quarter end, we executed a contract for security booking of over $500 million net of that, representing one of the largest contracts in the industry, providing an excellent start to Q4 bookings and greatly enhancing the already strong visibility we have into fiscal 24. Before diving more deeply into our financial results and discussing the fiscal 23 outlook, I will turn the call over to Deepak.

Thank you, Alan, and welcome once again to the OSI Systems Earnings Call for the third quarter of fiscal 2023. As Anshu mentioned, we are pleased with our fiscal third quarter performance in which we grew revenues by 4 percent and adjusted operating income by 18% from the same period a year ago, while generating 68% more operating cash flow in comparison to Q3 of 2022. Our robust backlog not only instills confidence for Q4, but also positions us well for a very strong fiscal 2024. I will briefly touch on some key highlights from our third quarter performance across each division before turning back the call to Alan for more in-depth discussion of our financial results. Beginning with the security division, where revenues grew 13% in Q3 with significant operating margin expansion from the prior year's comparable quarter. Just before the quarter end, as Alan mentioned, we announced an award notification of a significant contract valued at approximately $600 million, which includes approximately 16% value-added tax from Mexico's Department of National Defense, SEDANA, for our cargo and vehicle inspection systems and related services. Under this award, We expect to provide multiple units of EGLE P60 high-energy drive-through cargo and vehicle inspection systems, Z-backscatter cargo inspection portals, Carview vehicle inspection systems, and a proprietary CertScan software multi-site integration platform. These solutions are planned to be utilized to inspect trucks, buses, and cars at customs border checkpoints increasing the safety and integrity of Mexico's borders. We are honored for our solutions to play a crucial role in facilitating the smooth flow of trade. I note, and I want to make it very focused clear, that even though we announced the Sedana Award in Q3, The related contract was executed early in Q4 and thus is not reflected in the Q3 bookings or quarter end backlog. Also want to mention that this was a competitive bid in which we were selected. This Mexico award followed another large $200 million international order that we received in Q2 and announced in early Q3. These exciting sizable deals enhance our visibility and provide confidence as we enter Q4 and approach the next fiscal year, 2024. These wins also bolster our market presence as we expand in key regions. Throughout Q3, we continue to deliver on our U.S. Customs and Border Protection CBP contracts. where we are supporting the enhancement of us border security infrastructure using various cargo and vehicle scanning platforms and the search scan integration platform these initial delivery orders valued at approximately 200 million dollars were received under the LEP and MEP indefinite indefinite quantity awards which had a combined potential award value of approximately $870 million. CBP has room under these IDIQs to issue additional delivery orders to one or more of the vendors that are qualified on these contracts. It is also important to highlight that the Mexico Sedena Award, as well as our ongoing efforts at CBP US, offer border and customs agencies across the Americas the opportunity to access comprehensive and integrated solutions. By incorporating CertScan software, our proprietary software solution that helps manage inspection image data, traffic and vehicle identification at checkpoints, we are able to unify platforms and cater to the unique needs of these clients. This would make the trade more smoother between Mexico and U.S. Our turnkey projects in Albania, Puerto Rico, and Guatemala have been operating as anticipated, and we continue through these projects to demonstrate our experience and capabilities in handling large-scale programs. As Alan mentioned, this contract, especially to CERNA, to our knowledge, was the biggest contract in the industry to anybody for equipment. On the aviation side, We continue to serve our airport customers and other critical transportation and public infrastructure customers worldwide. In Q3, we announced an order worth approximately $20 million from ANA Airport of Portugal. The order involves providing multiple units of our RTT, real-time tomography, explosive detection systems. These units are expected to be installed at various airports across Portugal. to enhance security by screening passengers' hold or checked baggage. Additionally, as part of this award, we are engaged to deliver ongoing maintenance service and support for these installations to ensure the system's reliable operation. During the quarter, we also received a $16 million service contract renewal from an OEM for checkpoint maintenance at U.S. airports. Looking ahead, We continue to see airport activity improving and anticipate that airport authorities will make prudent capital investments to continue upgrading security infrastructure for passenger safety. Moving on to our optoelectronics and manufacturing division, where we reported revenue growth of 2% in the third quarter, accompanied by strong operating margin expansion. We continue to experience some supply chain challenges for specific components, but we are actively implementing strategies to lessen the impact and maintain smooth operations. Opto Division continues to work with a broad base of customers, primarily technology OEMs, to provide components and sub-assemblies from our operations in US, UK, Canada, Malaysia, Indonesia, and India. Our backlog continues to be strong with a diversified OEM customer base, and we continue to position ourselves as an option for OEMs that seek offshore manufacturing partners as an alternative to China-based manufacturing. And finally, on to the healthcare division, where revenues were approximately 16% lower than in the prior years Q3. Disappointing. Apex spending in the hospital industry continues to be challenged by several elements, including elevated spending during the pandemic years and the current economic environment of constrained capital markets. During the quarter, we announced a $3 million order to provide patient monitoring solutions and support services to a Canadian-based hospital. This is a strategic win in a critical region for us. During Q3, We completed the acquisition of a small company called ParaHealth, a company that develops predictive enterprise software to alert clinicians and doctors to patient deterioration, helping to reduce in-hospital mortality, unplanned transfers to the ICU, and drive more timely decisions making for optimized patient care. The para health predictive solution, along with our existing safe and sound patient alarm management help us differentiate in the marketplace. During the quarter, we also added new talent to the sales and marketing leadership in the US. Q4 is typically a strong quarter for space labs. Based on seasonality and near-term visibility on certain opportunities, We believe that Space Labs has the potential to perform much better in Q4 than its recent performance of Q3. Overall, we are on track to finish Q2023 strong and continue our momentum into the next fiscal year. As always, I would like to thank our employees, customers, stockholders for their continued support. With that, I'm going to turn over the call back over to Alan to talk in more detail about our financial results and guidance before we open the call for questions. Thank you.