OSI Systems, Inc.

Good day, and thank you for standing by. Welcome to the OSI Systems, Inc. second quarter 2024 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 11 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, CFO. Please go ahead.

Well, 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 24 Second 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 2024 Fiscal Year Second Quarter financial results. Before we discuss our results, however, I'd 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 further 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 press release. I will begin with a high-level summary of our financial performance for the second quarter of fiscal 24 and then turn the call over to Deepak for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and a discussion of our outlook for fiscal year 2024. We mentioned on the last earnings call that we expected to see accelerated growth beginning in Q2, and that was indeed the case. Our second quarter financial results were very strong, with the security division again generating double-digit revenue growth and significant year-over-year operating margin expansion. The opto division performed solidly, while the healthcare division experienced a challenging quarter. We anticipate significant overall revenue and earnings growth for the balance of fiscal 24, and we are encouraged by the momentum in the business. Let's start with a summary of our fiscal 2024 Q2 results. First, revenues increased 26% year-over-year to a Q2 record of $373 million, driven by the performance in our security division where revenues were up 49% year-over-year. Second, the strong revenue growth, coupled with gross margin expansion, led to record Q2 non-GAAP adjusted earnings per share of $2.21, up 86% from Q2 of the prior fiscal year. Third, bookings were solid, with a book to bill of approximately one, and we ended the quarter with a backlog of nearly $1.8 billion. This strong backlog provides outstanding visibility for the full fiscal year. Before diving more deeply into our financial results and discussing the fiscal 24 outlook, I'll turn the call over to Deepak.

Thank you, Alan, and thank you to everyone joining us today. I'm happy to report a record-breaking second quarter for fiscal 2024 with revenues reaching $373 million, representing 26% growth year-over-year, and operating income growing 105% over the same period from last year. This exceptional performance was driven by relentless execution in security, complemented by solid results in the optoelectronics and manufacturing division. Our backlog, as Alan mentioned, and opportunity pipeline remains extremely healthy. providing confidence for strong performance in the second half of 24 and beyond. Let's discuss each division's performance, starting with security. The security division delivered Q2 revenues of $250 million, representing 49% growth year-over-year from last year, then doubled its profitability in the same period. The adjusted operating margin expanded significantly to 22.7%, reflecting a favorable mix of higher gross margin sales, efficient operations, and robust market demand. Bookings were also solid. Despite the sizable conversion of backlog to revenue in the quarter, the security division's backlog at the end of Q2 was comparable to the start of the fiscal year, given a book-to-bill ratio of approximately 1.0 in the first half of fiscal 2024. Q2 marked the commencement of revenue recognition on our recent major cargo programs announced earlier with Sedena, the Mexican defense agency, as well as continued momentum on the cargo program with a large international customer previously announced. We continued to expand our presence for port and border solutions and secured significant recent new contracts. Shortly after the quarter end, we announced a $59 million contract that we received in Q2 from an EMEA region customer for various cargo and vehicle inspection platforms, including our Eagle series and Carview systems. Furthermore, we are expected to integrate these inspection systems into a national command center through our proprietary cert scan integration platform, which has been gaining traction with port and border custom agencies worldwide and allows us to differentiate our offering from our competitors. During the quarter, we also announced a $5 million award from a Latin American customer for port security solutions, including installation and integration support for the Eagle P60 high-energy drive-through cargo and vehicle inspection Z portals, high throughput, and the VM500 drive-through radiation monitoring portal. Both of these awards include maintenance and service elements and highlight the compelling value and versatility of the multiple platforms available in our broad portfolio, creating ample opportunities for recurring revenue going forward. Our aviation business also had a good quarter as well as airport related activity continued to return to pre-pandemic levels. As a testament to our expansion at airports, we converted on a couple of significant airport opportunities. During Q2, we announced an $18 million contract to enhance an international airport security infrastructure with advanced screening solutions, including the RTT-110 real-time tomography, explosive detection systems for screening hold baggage, METR walk-through metal detectors, and itemizer 5X explosive trace detection system for secondary screening of passengers. We will be providing comprehensive multi-year maintenance service and support as part of these awards. We also announced another international airport win of a $15 million order for various checkpoint screening systems, enhancing air passenger safety and threat detection capabilities Among the systems provided for this award include the Orion 920CT checkpoint screening system, Orion 920DX dual view checkpoint screening systems, and Itemizer 5X explosive trace detection systems. Besides the equipment, as well as recurring maintenance and service revenue in forward years, our turnkey projects continue to do well in Albania, Puerto Rico, and Guatemala. Excuse me. The aviation project for turnkey service that we announced last year at a European airport went live in December. For this airport, we manage screening services for the staff, airline crews, and vehicles at perimeter entry points. In addition, the planning phase has started for the recently awarded Uruguay port turnkey contract. and we look forward to becoming operational later this calendar year. With the numerous port and border opportunities in our pipeline, there are often meaningful discussions regarding a turnkey offering, even if the initial RFP or tender is for just traditional equipment and service only. We are excited to be the only company in the security screening marketplace that can point to a decade-long history of proven experience in managing successful turnkey programs of various sizes and scopes worldwide. Looking ahead, we believe that security division has unprecedented visibility with a strong backlog and pipeline of opportunities for robust growth in balance 2024 and beyond years. Let's look at the Opto Electronics Division, which had another solid quarter. The Opto Division has been working with certain OEM customers to accommodate their demand forecasts that have involved some short-term, near-term push-outs of deliveries. We see this as a transitional phase as OEMs in competitive markets increase levels to mitigate delays as a result of supply chain disruptions during the pandemic economy. Concurrently, We are also working with multiple OEMs to take over new programs as they trim their supplier base and gravitate towards more reliable and versatile suppliers like us. To that end, we had several notable bookings during the quarter and announced orders valued in aggregate of about $14 million. That included a $5 million order to provide electronic assemblies to a leading technology OEM customer, and another $5 million for electronic assemblies to a motion control and fluid technology OEM. And finally, a $4 million order to supply military-grade components for missile systems to a leading defense electronics OEM. These awards highlight our capability to cater to our customers' base, diverse, and specialized needs. Building on a trend stated last year, we are engaging with several customers that have a China centric supply chains and are looking to shift the focus to other regions like Southeast Asia, the U.S. or even near shore U.S. to help mitigate disrupt disruptions due to shutdowns and freight transportation. Consequently, we now have a wholly owned facility open just now operational in Mexico that has about 60,000 square feet dedicated to manufacturing electronic components and higher level assemblies. We are excited about this endeavor as many customers have indicated a clear desire to source from near shore, especially for finished products that are eventually destined for their customers in the US. Looking ahead, we believe that the Opto division is well positioned for long term success. And finally, Let's discuss the healthcare division where revenues were down approximately 4% compared to the same period in the prior year. Definitely a disappointment. We had anticipated modest growth, but certain larger US patient monitoring orders did not materialize in time. However, overall bookings were solid as the book-to-bill ratio was nearly 1.2, which is encouraging. The hospital market continues to be challenged But we had several nice order wins during the quarter and continue to strength our hospital presence. We announced three orders totaling approximately $12 million, which included a $5 million order for patient monitoring solutions and related accessories for a US-based hospital, where we will also provide our advanced Rothman indexed safe and sound exhibit, central station, and cube bedside patient monitors. This order arrived unfortunately close to the end of the quarter and could not be delivered within the quarter, but revenue is expected to commence in Q3. As I mentioned on the last call, Space Labs is working on new innovative offerings to the marketplace, such as leasing and subscription programs to help reduce the burden of capital spending by the hospitals. To that end, I am happy to announce that Space Labs has commenced offering remote telemetry management services to hospitals utilizing the safe and sound digital health platform and mobile app to provide real-time patient monitoring services. We are committed to enhancing patient care and expanding our footprint in the healthcare sector by offering differentiated innovative features like safe and sound patient alarm management and Rothman predictive health analytics. We continue to significantly invest in developing new products to further strengthen our patient marketing portfolio, including our next generation platform. Going forward, we will continue to focus on operational execution and aggressively pursue sales growth in this division that has the highest contribution margin in our company. Overall, we are very pleased with the company's fiscal 2024 second quarter performance. We are in a good position for the second half of 24 and have attained good visibility into fiscal 2025 and thereafter. Alan now will talk more in detail about our updated fiscal 2024 financial guidance, and then we'll open up to questions.