OSI Systems, Inc.

Thank you for standing by and welcome to the OSI Systems first quarter 2025 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 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 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 of OSI. Please go ahead, sir.

Well, thank you. Good morning, and thank you for joining us. As said, 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 25 first 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 fiscal 25 first quarter 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 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 first quarter of fiscal 2025 and then turn the call over to Deepak for a discussion of our business and our operational performance. We will then finish with more detail regarding our financial results and a discussion of our updated outlook for fiscal year 25. following our fiscal 24 financial performance, featuring record revenues and non gap EPS. We started fiscal 25 by posting record q1 financial results, led by the security division, resulting in robust year over year revenue growth, and a significant increase in year over year operating income. We are encouraged by the momentum reflected in our q1 financial performance. So I'll start with a high level summary of our fiscal 25 q1 results. First, revenues increased 23% year over year to a Q1 record of $344 million, driven by the performance in our security division, where Q1 revenues were up 36% year over year. Second, the significant revenue growth led to record Q1 non-GAAP adjusted earnings per share of $1.25. Third, bookings were again solid, and we ended the quarter with a backlog of approximately $1.8 billion. Our healthcare backlog, excuse me, our healthy backlog and robust pipeline of opportunities provide good visibility going forward. Fourth, we completed a convertible debt financing in July, raising gross proceeds of $350 million, which reduced our weighted average cost of borrowings and was immediately accretive. Concurrent with this transaction, we repurchased approximately 531,000 shares of our common stock. And finally, in September, we completed a strategic bolt-on acquisition in our security division. While the acquired business did not significantly enhance our Q1 revenues, this deal is expected to be accretive to fiscal 25 non-GAAP earnings per share. Before diving more deeply into our financial results and discussing the updated fiscal 25 outlook, I will turn the call over to Deepak.

Thank you, Alan, and good morning to everybody and afternoon. I'm pleased with the company's robust fiscal 2025 first quarter performance. As Alan mentioned, we achieved an impressive 23% revenue growth, leading to a higher year-over-year operating margin. We closed the quarter with a backlog near all-time high of $1.8 billion and are optimistic about the remainder of fiscal 2025 and beyond. So let's dive into the performance and highlights of each of our three divisions for the first quarter. Beginning with the security division, their Q1 revenues were up 36% year-over-year, resulting in increased operating profits. Also, security bookings were solid. During the quarter, we continued to deliver on port and border security initiatives with Mexico's defense agency, CEDENA. on the $500 million plus contract and with the other international customer on the $200 million contract. In addition, shortly after the quarter end, we announced the commencement of operations of our turnkey screening services in Uruguay utilizing our cargo and vehicle inspection systems along with our proprietary search scan integration platform. We will also provide on this contract ongoing management training, equipment maintenance, and support as part of the Uruguay contract. The Uruguay program now joins a list of our longstanding successful multi-year turnkey projects in Puerto Rico, Albania, and Guatemala, and serves as further evidence for potential customers of the breadth of our capabilities to manage large-scale security programs in various parts of the world. During Q1, we had several wins in security and announced these during the quarter. First, a $17 million international order to provide Eagle P60 high-energy drive-through cargo and vehicle inspection systems. and T-60 trailer-mounted vehicle inspection systems, including maintenance, service, and support. Second, a $26 million services order from an international customer to maintain and service its existing installed base of cargo and vehicle inspection systems. Third, a $10 million order from yet another international customer to provide the Z-backscatter van, ZBV, mobile cargo and vehicle inspection systems including training service and support and finally domestically we announced a contract of order of about 27 million dollars for maintenance services and technology support for its install base of wrapper scan cargo and vehicle inspection systems The agreement contains potential options for orders totaling up to $117 million over a three-year period. In aviation, we continue to make progress on our existing international airport project awards as airports expand and upgrade existing infrastructure, especially in Europe, Middle East, and Latin America. Our overall activity at airports and air cargo facilities continues to be robust. We have a good pipeline. We are also focused on developing new offerings for airport and air cargo customers, such as providing employee screening solutions for these customers. In some instances, this could be opportunities for complete turnkey services or hardware sales with remote monitoring services possibility. As Alan mentioned, during the first quarter of fiscal 25, we acquired a US based company that provides high power radio frequency based transmission and amplification solutions for critical military communication communications navigation and surveillance applications both in the US and international customers like our company's legacy offerings these products help provide security and safety for people and critical infrastructure we work with numerous defense and security agencies that utilize this technology in communication and surveillance solutions in summary This acquisition adds proven radio frequency-based technology and products to our portfolio, allowing us to leverage further our global manufacturing sales and service support infrastructure. Overall, the security division had a strong start in fiscal 2025, and we look forward to security again achieving a high level of performance to the balance of 25 and beyond. Moving to the Opto Electronics and Manufacturing Division, Opto reported revenues of 98 million, including intra-company sales, to reach a new first quarter record while delivering solid profitability. We saw notable strength and growth in our Flex Circuits product line. Many of our customers for Flex Circuits are from consumer tech and advanced medical device industries. We also have many customers who are leading OEMs in defense electronics. To that end, we announced a $5 million order for advanced optical sensors that the customer will integrate into its complex navigation and guidance systems. I should note here that an order of this size is relatively large for this division. Our operations in Mexico, which we began at the end of Q2 last year, are ramping up as we continue to introduce our existing and potential customer base to its capabilities and the net benefits of nearshoring. The uncertainty and risk for OEMs with China centric supply chains have never been more significant and our global manufacturing presence in US, Mexico, UK, India, Indonesia, and Malaysia provides a viable alternative to reducing these risks. Finally, onto the healthcare division. Q1 sales were down slightly year over year due to challenging marketing conditions, as we mentioned before. Still, the division delivered improved profitability, in part due to a more streamlined infrastructure. To support our customers, this division continues to offer innovative solutions and market its differentiation offerings like the Rothman Index-based predictive analytics software, and safe and sound patient alarm management software. We are focused on developing the next generation of patient monitoring solutions and continue to progress accordingly with an improved cost structure and a growing opportunity pipeline. We expect healthcare's performance to improve over the balance of fiscal 25. In summary, With a significant backlog and a clear path to near-term opportunities, we are increasingly confident about our prospects for fiscal 2025 and beyond. Our strategy of being a vertically integrated supplier with a flexible and responsive global footprint that meets its customers' needs while we continue to invest in and acquire strategic technologies and capabilities has created a robust business with a long-term sustainable growth potential. Finally, as you know, I have announced my retirement from my position as chief executive officer of the company at the end of calendar 2024, though I will remain as executive chairman of the board. In 1987, we laid the foundation for what would become OSI Systems, starting as an OptoSensors Inc. company and embarked on a new chapter by going public in 1997. From the beginning, our mission has been unwavering to deliver essential components and systems that enhance the safety and health of society. With the seasoned expertise of our current OSI management team, I'm confident in our ability to ascend to even more significant achievements. We expect to announce a successor before the end of the quarter. As such, this is expected to be my last earnings call as CEO, and it has been my privilege to lead the company over the past years, and I look forward to supporting OSI's journey ahead. With that, I turn the call over to Alan to talk in more detail about our financial performance and updated guidance before opening the call for questions. Thank you.

Thank you, Deepak. Now I will review in greater detail the financial results for the fiscal 25 first quarter. Again, Q1 revenues were up 23% compared with revenues in the first quarter of the prior fiscal year. This increase was primarily driven by our largest division, security. The 36% year-over-year increase in Q1 security division revenues was led by strong growth in our cargo and vehicle inspection product sales, as well as solid growth in our aviation and checkpoint product sales. Q1 revenues included continued shipments from the $200 million-plus cargo contract announced in January 23, and also from the $500 million-plus cargo contract announced in March 23. In addition, year-over-year security division services revenues increased 11%. Third-party opto sales were solid. delivering an 8% year-over-year increase driven by growth from our new Mexico operations. We continue to see certain Opto customers adjusting inventory levels and ordering patterns, which we anticipate seeing through the second quarter of fiscal 25 and perhaps a little beyond. And revenues in the healthcare division in the first quarter of 25, as Deepak mentioned, were roughly the same as Q1 revenues in the last fiscal year. The fiscal 25 Q1 gross margin of 35.3% was in line with the 35.4% gross margin in Q1 of last fiscal year, and up sequentially from the 32.1% in Q4 of fiscal 24. Our gross margin will generally fluctuate from period to period based on revenue mix and volume, impacts of changes in supply chain costs and inflation generally, among other factors. Moving to operating expenses. We continue to work diligently across each of our divisions to improve efficiency and manage our SG&A cost structure. Q1 SG&A expenses were $72 million or 21.0% of sales compared to $60 million or 21.4% of sales in Q1 of the prior year. The year-over-year dollar increase in costs resulted primarily from higher compensation costs in support of the company's growth and the weakening of the U.S. dollar creating unfavorable foreign exchange rates. Research and development expenses in Q1 of fiscal 25 were 17.8 million, or 5.2% of revenues, compared to 15.9 million, or 5.7% of revenues in the same prior year quarter. We continue to dedicate considerable resources to R&D, particularly in our security and our healthcare divisions, as we remain focused on innovative product development which we view as vital to the long-term success of our businesses. We recorded $1.2 million of restructuring and other charges in Q1 of fiscal 25 compared to $0.5 million in the same quarter of the prior year. Moving to interest and taxes. Net interest and other expenses in Q1 increased to $7.4 million in fiscal 25 from $5.7 million in fiscal 24, primarily due to a higher amount of borrowings partially offset by the favorable impact of the convertible notes issued during Q1, which were partially used to repay higher-cost borrowings. Our reported effective tax rate under GAAP was 21.9 percent in Q1 of fiscal 25, compared to 23.4 percent in Q1 last year. Excluding the impact of discrete tax items, our normalized effective tax rate, which is the rate reflected in our calculation of non-GAAP-adjusted BPS, was 24 percent in Q1 of fiscal 25 compared to 25.8 percent in Q1 of 24. I will now turn to a discussion of our non-GAAP adjusted operating margin. Overall, our adjusted operating margin in the first quarter of fiscal 25 increased to 10.3 percent from 9.6 percent in Q1 of fiscal 24. The Q1 fiscal 25 non-GAAP adjusted operating margin of 14.4 percent in the security division was up slightly from the comparable prior year quarter and included the absorption of some notable adverse effects. The adjusted operating margin in our opto division was 12.0% in the first quarter of fiscal 25 compared to 12.8% in last year's Q1. Excluding the adverse impact of FX in the opto division, the margin was relatively in line year over year. The healthcare division reported a nominal increase in its adjusted operating margin Moving to cash flow. Cash use and operations in the first quarter was $37 million, primarily in relation to higher inventories and receivables in support of the security division's revenue growth. CapEx in the first quarter was $7.7 million, while depreciation and amortization expense in Q1 was $11.5 million. With respect to cash flow, I wanted to take a moment to provide some additional accounting insight on our receivables and DSO both of which have risen primarily due to our significant international security contracts. Under GAAP, we typically recognize revenue as we ship or deliver products, depending upon the specific contractual obligations. For civil works, we typically recognize revenue over time as we complete the construction phase and ultimately install the products. On certain contracts, like our significant international security contracts we earlier referenced, Billing is triggered by the achievement of certain project milestones, which are highly influenced by the customer's timeline and sign-off. As such, an unbilled receivable is recorded as we recognize revenue under GAAP, but billing and the resulting cash collection occurs subsequent to the achievement of the milestone. Therefore, the elevated AR and DSO is normal course for large government contracts, does not factor into the cash economics of the transactions, and is just timing related. Our goal is to collect cash as early as we can, and the trends for typical billed receivables remain strong, as DSO for billed receivables is approximately 87 days. We anticipate operating cash flow could be quite significant in the second half of fiscal 25, and potentially even stronger in fiscal 26. Our balance sheet is solid, with net leverage of about 2.3 as calculated under our credit facility. Aside from $7.5 million of annual required principal repayments under our bank term loan, the bulk of our debt matures in fiscal 27. As mentioned earlier, during Q1, we issued $350 million of convertible notes with a coupon of 2.25%, due in fiscal 30, and an initial conversion price of approximately $192. The proceeds were used to partially pay down our bank revolver and to purchase approximately 531,000 shares of our common stock, as well as cover transaction costs. This transaction provides enhanced liquidity to capitalize on future strategic initiatives, while simultaneously being immediately accretive, given a significant reduction in interest costs and a reduction in our share count. As a result of completion of the convertible notes deal and partial paydown of our bank debt and the interest rate swap we entered into approximately two years ago, over 70% of our debt was fixed versus floating at the end of Q1. Finally, turning to guidance. We are updating our fiscal 25 revenues and non-GAAP diluted EPS guidance. For fiscal year 25, we anticipate revenues in the range of $1.67 billion to $1.695 billion, increasing our guidance on year-over-year revenue growth from a range of 5.3% to 7.2%, to a range of 8.5 to 10.2 percent growth. We are also increasing fiscal 25 non-GAAP adjusted earnings per diluted share guidance to a range of $9 to $9.30 per share, or 10.7 to 14.4 percent growth. This fiscal 25 non-GAAP diluted EPS guidance excludes potential impairment, restructuring, and other charges, amortization of acquired intangible assets and their associated tax effects, as well as discrete tax and other non-recurring items. We currently believe this guidance reflects reasonable estimates. The actual impact on the company's financial results of timing changes on the expected conversion of backlog to revenues, disruptions in the supply chain, and inflation is difficult to predict and could vary significantly from the anticipated impact currently reflected in our guidance. Actual revenues and non-GAAP EPS could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings. We continue to remain focused on the growth of our businesses. We believe our efforts will enable OSI to continue providing innovative products and solutions. We would like to take this opportunity to thank the global OSI team for its continued dedication in supporting our customers and partners. And as a lifelong Dodgers fan, while we respect the Yankees, I must conclude with go Dodgers. At this time, we will open the call to questions.

Certainly. And our first question for today comes from the line of Josh Nichols from B. Reilly. Your question, please.

Yeah, thanks. And go Dodgers, indeed. I guess just looking at this, I wanted to get a little bit more color. I mean, this is actually usually the seasonally slower quarter, particularly in Europe in the later summer months. But the security... is doing quite well. The overall backlog actually kind of increased 100 million sequentially. I know you announced 80 plus million or so like security awards during the quarter, but you did have about a quarter of a billion dollars in security revenue. Can you provide just a little bit more granularity on what's been driving that backlog growth overall, despite it being a little bit seasonally slower as we kind of touched on?

Sure, Josh, this is Alan. Great question. So, yes, we've seen strength in our security division. You're right, with sometimes a typically slower seasonal quarter on the revenue side. We really saw strength across our businesses. We saw it across the geographies, the Americas, Asia Pacific, and the EMEA region. We saw strength across our product lines in the aviation and the cargo and solutions. So it was really a nice bookings quarter for us. positioning us with an excellent backlog as we look out to the rest of fiscal 25 and beyond.

Thanks. Just kind of curious, you're clearly the lead horse when you look at security, cargo, vehicle inspection. You did note that you're seeing good revenue as well as opportunities on aviation and things like that as well. What's the opportunity do you think to potentially increase size and market share on that piece of the business where you're still probably like the number two, number three player instead of the lead player like you are on traditional cargo and vehicle inspection systems?

Good question again. This is Deepav here. Definitely we see good pipeline, strong expectations in the aviation and air cargo space. primarily into the international sector. As I mentioned, in Latin America, in Asia, and in Europe, everywhere, there is much more traffic of passengers going, which is making the airports get to the next level of upgrading their systems. At the same time, we have said many times before on our calls, air cargo is a very focused space for us. And we continue to grow in that business. And our idea also is that we want to do something different, innovative. What I said mentioned employee screening, both at the airports and at air cargo freight facilities. So all that adds up to, in our opinion, that that whole area will continue to see growth. And we are well positioned into it. At the same time, I know that people ask us about the U.S. We are working with TSA. and whenever the next replacement cycle comes in, we'll be ready.

Thanks. Then just last question for me, just touching on the acquisition. Good to see the company adding some RF to the product portfolio. I know you described it as a bolt-on acquisition, so I assume it's not going to be a huge contributor to revenue or EPS for this year, but if you could provide... Any additional color on that? And then also expectations in terms of potential synergies or how you could layer this into your global footprint for sales and manufacturing and potentially ramp up sales or expand margins on that front?

Again, good question. As you know, our strategy is that we look at one plus one must make more than two. This is a strategic acquisition. It's a little different technology, but it fits very well in because The same customers that this company works with, we work with the same customers, both domestically and international. And with our footprint being larger, we expect that we'll be able to put this together and be able to go after a much broader customer base. At the same time, with our service support, with our manufacturing, it definitely has synergy into it. But more important into it, it broadens our technology platform which is what we've been doing for the last decade or so to broaden our product portfolio.

I appreciate that, Deepak, and congratulations again.

Thank you.

Thank you. And our next question comes from the line of Mariana Perez-Mora from Bank of America. Your question, please.

Thank you so much. Deepak, congratulations on the professional journey and also on the partial retirement, I guess. My first question is about the pipeline. I understand for competitive reasons, you cannot give a lot of granularity into it, but how should we think about the pipeline of opportunities in the next six months or 12 months? And is there, like, particular, like, I don't know, big contracts there that we should be watchful for, specific regions? Like, how should we think about that?

Well, again, good question, but you also answered it, too, that we can't be very specific. Basically, we have been saying for a long time, we consider ourselves in the cargo space as a leading company. We are very much focused onto it domestically with CBP and other state department and other, other customers here internationally with the broad base that we have, there's a lot of activity. And the other thing that it's tough to say it, but as the world becomes more unsafe, uh, requires more security awareness and we have the products for that. And, uh, We have a very broad reach. So we look at this as a very strong pipeline, very strong globally. And with our name and our reputation and our turnkey services in various parts of the world, we definitely get invited to every dance there is.

So if I were to, let me ask it in a different way. If I were to assume about like 50% of your backlog, is going to convert into the next, like, 12 months. And then the services or a piece of that, of the aftermarket that you're going to support is not there. I'm still missing about, like, what, like, around, like, a fourth of the revenues that you need to still, like, get into contracts. Like, how strong is the pipeline compared to that?

Very strong. And all the time we've been saying it, You know, these kind of contracts take longer years in time, the bigger the size it is. So we've been working with these customers for a long time. And with our reputation and our success in U.S. and Mexico and other places, we feel very good about it that these things will mature in a timely fashion.

What are the key risks that you're looking at in terms of timing of those opportunities?

Would you repeat it again?

I didn't get the last word you said. What are the key risks that could delay some of these opportunities?

Key risks?

Risks. Well? Any challenges, yeah.

Well, obviously the economy, the world economy, is always a potential risk. But besides that, You know, from time to time, things can change, unrest there or something else there, government funding. So I don't see any specific risk. History speaks for itself. We already are in this unrest both in Middle East and the Ukraine-Russia area. Our requirement, our pipeline has not weakened. we continue to look at it and as i mentioned as you go what is called the other side of the coin not security as you look at what is called people are moving away from china they want to set up manufacturing in other parts of the world we have the product and the infrastructure to be there for ports and borders for crossings for airports air cargo so we look at that we don't look at it as any risk anyway

Right, and then let me double-tap into what you just mentioned, but not only from a security point of view, but from the optoelectronics type of opportunity. You mentioned this $5 million order that you received. Could you please give us some color around the demand, especially in the US or the UK, for this type of niche sensors or electronics?

Again, good question. So the reason we mentioned that $5 million is a significant order, that's in the optoelectronics side. Those are components and subassemblies that we make for other OEMs. And what we mention is that that pipeline is a very reliable pipeline because we are designing to those customers in the medical industry, in aerospace industry, defense industry, consumer industry. so that we have a very good foresight into that pipeline, and our customer base is very strong, and our manufacturing global in Malaysia, Indonesia, India, UK, that helps us very much, and the new facility in Mexico, as people start looking at more alternate to China. So that looks like, again, a good opportunity and a good, strong visibility.

Thank you. And last one from me on the receivables. Thank you for the color on the unbuilt receivables. But when you think about like future contracts, considering these like accounting issues, but also that you're actually transferring some of your assets, like is there any way you can like request earlier payment or a down payment from these international customers in contracts that are this large or how that works?

Yeah, Mariana, this is Alan. Great question. We have very often in the past requested considerable advances and down payments, which help to fray some of the inventory buildup and some of the AR. When we can get that, we absolutely do. There are certain contracts that go out by RFP where we cannot really dictate terms. The terms are kind of dictated by the customers in those regards. And if they make good, strong economic sense for us to take the contract, even though it might require some adverse cash flow on a short-term basis, we'll go ahead and proceed with that. But whenever we can get customer advances or can negotiate payment terms that are more favorable to us, we absolutely do. We're keenly in tune with that.

Great. Thank you so much.

Thank you. And our next question comes from the line of Matt Akers from Wells Fargo. Your question, please.

Hi, thanks for the question. I guess following up on the working capital, and thanks for the color, Alan, I guess is there a target we should think about getting back to days of receivables or however you want to frame it? I'm just trying to think if there's an opportunity to get back to the level of receivables we were at two, three years ago, or has something in the business changed that maybe that's going to linger a little bit higher than it had been in the past?

Yeah, good question, Matt. This is Alan. Yeah, we do believe that we can get back to the DSO levels that we had experienced in the past, as you mentioned. A big part of the higher DSO and unbilled receivable relates to the big Mexico contract, the Sedena contract that we refer to. And while that's a great contract from us, from a sales and an earnings perspective and a great beachhead for us, it does have those milestones where the cash flow isn't necessarily as strong. We'll certainly look to get more contracts like that in the future, and that could have an adverse impact on our DSO from time to time. But if you look at us from a historical perspective, we operate, generally speaking, in a relatively narrow band of DSO that is much lower than where it is today, and we would anticipate kind of returning to that norm in the future.

Yeah, got it. Okay, thanks. I guess on a healthcare business, good to see the profit up even with sales kind of flattish. I guess can you talk a little bit about how you got there, and should we see kind of a similar benefit year-over-year for us? I know there's some seasonality in there, but kind of a similar kind of uptick.

Yeah, Matt, this is Alan. You're right. Seasonally speaking, the healthcare business is slowest in the Q1 in the September quarter. So as Deepak mentioned in his earlier remarks, we do expect improved performance through the rest of the year. The way we got to stronger profits on similar or slightly down revenues was also the initiatives that Deepak referred to where we enhanced the operational infrastructure and took out some costs. The healthcare business for us is the highest contribution margin business. So as revenues go up, there's an awful big pull-through to operating income and EBITDA. So as we do anticipate revenues being stronger in future quarters than they were in Q1, coupled with the linear cost structure that we have, there's a really nice opportunity for some nice margin expansion.

Yeah, got it.

Thanks.

I guess if I could squeeze in one more. I guess the acquisition... Maybe I missed this, but is it possible to size that or at least, I guess, if we think about the guidance raised, kind of was most of that organic or was sort of the acquisition a big chunk of that?

Sure. Good question. You know, the guidance raised, you know, really factored in our increasing confidence in the outlook, which was based upon the strong bookings along with the contributions from the security acquisition that you just mentioned, you know, partly offset on the earnings side by, forecast an increase in some interest costs and maybe some general conservatism based on market uncertainty. But the guidance raised was a factor of the acquisition and increased confidence in our overall business. Got it.

Thank you.

Thank you. And our next question comes from the line of Larry Solo from CJS Securities. Your question, please.

Great. Thank you. And first of all, Deepak, congratulations. It's been a good almost 10-year run for us working with you. And I wish you, you know, best of luck in the transition. I'm sure you're not going anywhere so fast, but best of luck to you. Just following up on that last question, Alan, just on the acquisition, I know you increased guidance by 15 cents. Just any more granularity? Is the acquisition like half of that increase? And, you know, is it, you know? Most of the increase, just trying to get a little more specifics on that, if you can.

Sure. So the acquisition did contribute to both the top-line increase and the bottom-line increase. I mentioned earlier that the acquisition is expected to be accreted to us in fiscal 25, and we probably went a little bit conservative as we get to know the business even better. But, yeah, you could say that the – The increase in guidance was split between the acquisition as well as just our greater confidence in our own organic business.

Okay, fair. And then just on the bookings and the backlog, I think it seems like it grew about $100 million from the end of the year or over the last quarter. Can you just give us any grand – just specifically, I imagine most of it was security. Was the book-to-bill – Above one in the quarter, any more color on that?

Sure. Good strong bookings by the security business. The book-to-bill was approximately one for the quarter. The backlog grew a little bit associated with some acquired backlog as well. The growth in the backlog was really entirely attributable to our security division.

Gotcha. And you mentioned the margin, which I think was up a little bit year over year, roughly flat on an adjusted basis in just security. But I think you did mention there was down a few sort of one-timers or non-recurring things. Did I hear that correctly?

Really, the main item that adversely impacted our operating margin, both in security and in opto, and then, of course, we're playing the OSI, was FX. with the weakening dollar that had an adverse effect on us this quarter and not to an insignificant amount. But we were able to absorb all that and still report what we believe to be very strong results. So I think there's some upside to that based upon what happens in FX in the future.

Gotcha. And just on the service portion, I know a nice increase. I think revenue grew 11%. Again, that's mostly security, I think. Do we expect that service kind of piece to continue to kind of perhaps even grow faster than product revenue. Well, assuming you don't get much, you know, hopefully you get big, larger deals going forward too. But in the near term, should that service piece sort of maybe grow faster as some of these contracts, some of these newly installed things come off warranty and whatnot, and you get more of that service piece kicking in? Is that sort of fair to say? Any thoughts on that? Yeah.

Larry, it's Alan. You know, excellent insight and good question. You're right, our product revenue growth was far superior to our service revenue growth last year and even in the Q1 as we've been fulfilling some of these large contracts. But as we do fulfill them and they start rolling off of warranty, the service revenue really significantly increases. So you're right, there's a very good chance that our service revenue growth, that nice recurring revenue, will grow through the balance of the year at a faster clip than our product revenue. Now, of course, we hope to get some new, you know, very nice-sized product revenue deals, too, and fully expect we will. But you're right. We do expect to see an acceleration of our service revenue growth.

Got it. And just so I can squeeze one more in, just on the opt-out piece, I know you mentioned still some inventory management. But actually, I think it looks like if we kind of adjust out for the inter-segment sales, you had some pretty nice growth in the core. I think revenue would have been, you know, grew 8%, right, all in there. on an external basis, which is a pretty nice growth rate. Do you expect that to continue through the year? And the second part of the question is, it looks like margin was a little offset and that was a little bit down. Anything to read into that? Thanks.

Sure. It's Alan again. So good questions. Sort of two things on the optimum. On the revenues, you're right. The 8% external revenue growth was fantastic. I think we're still seeing some inventory right sizing and corrections by our customers. So I think that number will moderate. here as we move into Q2, but as we move into the second half of the year, we expect stronger sales growth in Opto. In terms of the margin, the margin impact on Opto, similar to securities in some sense, was impacted by FX, where we put some notable FX hit in Opto. Outside of that, our operating income in Opto increased as well. So we would expect to see improved operating profits in the Opto business, particularly as we hit the back half of the year as well.

Got it. Thanks for all the call. I appreciate it. And good luck again, Deepak. Thanks.

Thank you. And our next question comes from the line of Christopher Glenn from Oppenheimer. Your question, please.

Thanks. First off, Deepak, congratulations on your pending transition and the success of the company here. had a question on the opto segment are you seeing any end markets as you try to look through you know reshoring nearshoring and inventory adjustments which you know that pattern must must be getting a little long in the tooth you see an actual any actual like end demand or customer production um start to see any cyclical recovery well

If I understand your question, we don't see any end of any of our big products in opto? Is that what the question is? No, no, sorry. The end markets.

Any end markets starting to move favorably from, you know, a cyclical perspective.

Yeah, we are. Maybe you want to answer. I didn't understand it. Sure, sure. Chris, this is Alan. Yeah, we are seeing some strength in defense. So we're seeing some strength in the defense markets. maybe some continued softness in the medical markets with OEMs, but overall probably strengthen the defense and the other markets being a bit more neutral.

Just to add on it, now that I understand it, again, even in the opto area, we have a very good product line support for the defense business. And as there is more unrest in the world, that puts a little bit more requirement for optoelectronic products for various defense equipment that is being asked for in these places. So we look at it that our opto defense business has seen some good pipeline growth and looks like good forecast going forward.

Great. Thank you for that. And putting the acquisition aside, on the organic products, component of the raised revenue guidance. Is that more reflecting the pacing of Mexico or the other international or some of the activity on the normal kind of shorter lead time projects?

Sure, Chris. Good question. This is Alan. It's really more on the other part of the business. I wouldn't say any of our increase really relates to Mexico. It's much more the other strong business that we do throughout the world in our various product lines in the security business.

Great. Thank you. That's all I've got.

Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. Our next question comes from Jeff Martin from Roth Capital Partners. Your question, please.

Thank you. Good morning, Deepak and Alan. I wanted to dive in a little more on aviation. It was interesting that you talk about remote monitoring capabilities. Do you see that being a near term driver or is that more of an intermediate to longer term driver?

I think it's a question of intermediate to longer term. We have some pilot projects already in the making. And just like what we did in the cargo side and the turnkey business, these kind of products take some time. And we've had a control room that we are doing remote monitoring of the employee screening. We are looking at some talking to some airports for their employee screening. So the answer is it's a longer term. And again, we think that this is a good potential. And we are capable of doing it. We have the strength and the technology behind it learning from the cargo side. So that this looks like a good product line to go, a good product to go after.

Okay. And then with respect to the RF technology acquisition, help us understand strategically how RF fits into your existing product line, how much market opportunity this might open up, and is this something that you felt was lacking within your product portfolio that you needed to pursue? And then secondarily, could you just generally talk comment on the M&A environment, if there's an acceleration potentially forthcoming for OSI. I know you've been opportunistic with your M&A historically, but just curious if you expect M&A to be a more prominent contributor in the next couple of years here.

Good question, Jeff. First, to answer your first question, this particular acquisition was a product line that is not in our other products we looked at that as a complementary because we cater to the same customers both domestically and internationally so we've looked at it and said this technology fits very well into a broader portfolio so we can offer a broader service and be able to get to customers where this company had the product and by the way they have the proprietary products that They can sell, but they don't have the size. We have the size, and we have the infrastructure globally. So this fitted very well into it that we could go back and go to a broader base and grow the business. Reverse of that, they are in certain customers where we think that now that we are in that, we can sell some of the other products that we have and into the same customer base. So that way it gives us what we call one plus one is more than two and we can go grow the business as it grows.

Thank you for that. With respect to the second part of that question, M&A going forward, it seems like you've got significant potential to layer in leverage in the model from both the sales and manufacturing side of things. Is that something you perceive being more prominent contributor going forward?

You know, we've always looked at it like Alan mentioned. We have a good, strong balance sheet. We have a very big focus to look at it, but we are very selective. It must make sense one plus one more than two. We continue to look at it. Are there opportunities? We are not going to say which specifically, but we keep looking at a broader area all the time. And to answer your question, focus is going to be more focused on the security side than the other side, but we also look at the other side.

Great. And then last one for me, Alan, if you could comment a little more detail on the, you know, guidance relative to maybe a shift, push to the right of your pre-cash flow expectations. I mean, you do have significant working capital to unwind here, but, you know, just curious if you can quantify perhaps the EPS impact you know, current guidance versus previous guidance with respect purely to the interest expense?

Yeah, good question, Jeff. I would say that there was probably a 5% to 10% impact to the additional borrowings and the cash flow moving a little bit to the right to our overall EPS guidance that we just provided, which compared to what we provided in our previous call.

Very helpful. Thank you so much.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Deepak Chopra for any further remarks.

I want to thank everybody for listening to us, and I want to thank all the employees and our customers for trusting in us, and I'm looking forward to continued growth, and I'm there to support the management of OSI. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.