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OSI Systems, Inc. (OSIS) Q2 2024 Earnings Call Transcript

OSI Systems, Inc.(OSIS)

Q2 2024 Results Conference Call

Company Participants

Alan Edrick - Executive Vice President and Chief Financial Officer

Deepak Chopra - Chairman, President and CEO

Conference Call Participants

Josh Nichols - B. Riley &Co.

Christopher Glynn - Oppenheimer

Lawrence Solow - CJS Securities

Jeffrey Martin - Roth MKM Partners

Presentation

Operator

Good day and thank you for standing by. Welcome to the OSI Systems, Inc. Second Quarter 2024 Conference Call. [Operator Instructions] 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.

Alan Edrick

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 both to 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 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 of 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 1, 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.

Deepak Chopra

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 double this 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 potent 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 car view systems. Furthermore, we are expected to integrate these inspection systems into a national command center through our proprietary CertScan 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 continue 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 RTT110 Real Time Tomography, explosion detection systems for screening whole baggage, metal walkthrough metal detectors, and Itemiser 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 Itemiser 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. 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 or 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 balanced 2024 and beyond years.

Let's looking at the Optoelectronics Division, which had another solid quarter. The Opto division has been working with certain OEM customers to accommodate their demand forecast that have involved some short-term, near-term push outs of deliveries. We see this as a transitional phase as OEMs in competitive markets increased 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....

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